USD To Succumb To FOMC Minutes, Australian Dollar Strength At Risk

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9813.96	9842.04	9792.75	-0.19	68.55%

Although the Dow Jones-FXCM U.S. Dollar Index ( Ticker: USDollar ) remains 0.19 percent lower from the open, the upward trending channel in the 30-minute chart instills a bullish outlook for the greenback, and the reserve currency looks poised to track higher over the remainder of the week as the heightening risk for a Greek default drags on market sentiment. Indeed, the bullish momentum in the relative strength index reinforces our call for additional dollar strength, but we may see the USD consolidate before pushing higher should the Federal Open Market Committee Minutes dampen the appeal of the greenback. Nevertheless, as the index appears to be establishing a new trend, we will be looking for opportunities to buy the dollar as the flight to safety gathers pace.

As the USDOLLAR struggles to trade above the 50.0 Fibonacci retracement around 9830, we may see the greenback face sideways price action over the near-term, but a fresh batch of comments from the FOMC could spur a significant move in the index as market participants weigh the prospects for future policy. We expect the Fed to soften its dovish tone as economic activity gradually gathers pace, and the more robust recovery may lead the central bank to endorse a wait-and-see approach throughout the first-half of the year as the risk of a double-dip recession subsides. In turn, a less dovish statement could pave the way for a run at the 61.8 percent Fib around 9,949, but market participants may retain bets for another large scale asset purchase program as Fed Chairman Ben Bernanke keeps the door open to expand the balance sheet further. Should speculation for QE3 come back on the radar, the FOMC Minutes could spur a bearish reaction in the USD, but we maintain a bullish outlook for the reserve currency as the fundamental outlook for the world’s largest economy picks up.

Three of the four components advanced against the USD, led by a 0.43 percent in the Australian dollar, and the high-yielding currency may strength further over the remainder of the week as employment in the $1T economy is expected to increase 10.0K in January. However, the labor report may fall short of market expectations amid the slowing recovery in Australia, and a slew of dismal development could spark a sharp selloff in the exchange rate as market participants see the Reserve Bank of Australia taking additional steps to stem the downside risks for the region. According to Credit Suisse overnight index swaps, investors are pricing the RBA to cut the benchmark interest rate by more than 50bp over the next 12-months, and we may see increasing bets for additional monetary support should we the fundamental outlook for Australia deteriorate further. In turn, the overnight rebound in the AUD/USD could be short-lived, and we may see interim support around the 20-Day SMA (1.0654) give way as the pair carves out a top in February.

--- Written by David Song, Currency Analyst