USD Outlook Hinges On FOMC Minutes, AUD Slumps On Rate Expectations

By David Song, Currency Analyst





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DJ-FXCM Dollar Index






T he Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar ) is 0.19 percent higher on the day as currency traders scaled back their appetite for risk, and we expect to see the bullish sentiment underlining the greenback gather pace going into the middle of the week as long as the Fed continues to soften its dovish outlook for monetary policy. As the dollar continues to find interim support around 9,900, we should see the index breakout of the downward trending channel, but we may see the descending triangle continue to take shape should the central bank keep the door open to expand its balance sheet further.

The upward trending channel in the index continues to reinforce our call for more dollar strength, but we are keeping a close eye on the bearish divergence in the relative strength index as it points to a sharp selloff in the reserve currency. As the technical outlook paints a mixed picture for the USD, we will be looking at the fundamentals to generate a clearer bias for the dollar, and the FOMC Minutes may spur increased demands for the reserve currency as Fed officials see the recovery on a more sustainable path. In turn, the policy statement may dampen speculation for another large-scale asset purchase program, and the developments could be the catalyst to push the greenback back towards the 78.6 percent Fib around 10,118 as interest rate expectations pick up.

Three of the four components weakened against the reserve currency, led by a 0.33 percent decline in the Australian dollar, and the high-yielding currency is likely to face additional headwinds over the near-term as the Reserve Bank of Australia looks to carry out its easing cycle throughout 2012. According to Credit Suisse overnight index swaps, market participants are looking for 75bp worth of rate cuts over the next 12-months, and we may see Governor Glenn Stevens shore up the ailing economy throughout the year as China – Australia’s largest trading partner – continues to face a risk for a ‘hard landing.’ As the AUDUSD carves out a key top in the first quarter, we should see the pair maintain the downward trend carried over from the previous month, and the aussie-dollar looks poised to give back the advance from earlier this year as the dovish remarks from the RBA drags on interest rate expectations.

--- Written by David Song, Currency Analyst