USD Index Looks To March Highs Ahead Of NFPs, AUD Weakness Ahead

By David Song, Currency Analyst

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10031.8

10048.07

9998.2

0.10

74.45%

T he Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar ) is 10 percent higher from the open after moving 75 percent of its average true range, and we may see the greenback appreciate further over the next 24-hours of trading as market participants scale back their appetite for risk. As the flight to safety spurs increased demands for the reserve currency, the dollar may make a run at the March high (10,097), but we may see a short-term correction as the relative strength index falls back from overbought territory.

As NFPs take center stage, we’re expecting to see 205K rise in employment, and the ongoing improvement in the U.S. labor should help to prop up the greenback as it dampens speculation for additional monetary support. Indeed, St. Louis Fed President James Bullard endorsed a wait-and-see approach amid the more robust recovery, and warned that ‘additional policy actions may create an over-commitment to ultra-easy monetary policy’ while delivering a speech earlier today. In light of the recent rhetoric from Fed officials, it seems as though the central bank is looking to conclude its easing cycle this year, and the FOMC may pave the way to start normalizing monetary policy towards the end of 2012 as the recovery gets on a more sustainable path. As the USDOLLAR preserves the upward trending channel from earlier this year, we anticipate to see another run at the 78.6 percent Fibonacci retracement around 10,118, and the bullish sentiment underlining the reserve currency should continue to gather pace as the Fed softens its dovish tone for monetary policy.

Two of the four components lost ground against the greenback on Thursday, driven by a 0.60 percent decline in the Euro, while the Australian dollar advanced 0.38 against its U.S. counterpart. As the AUDUSD bounces back from the monthly low (1.0242), we may see the pair revert back towards former support around the 200-Day SMA (1.0396), but we maintain a bearish outlook for the exchange rate as it maintains the downward trending channel from March. It seems as though we’re seeing a short-term correction as the relative strength index holds the downward trend from back in February, and the pair may looks poised to give back the advance from earlier this year as interest rate expectations falter. According to Credit Suisse overnight index swaps, market participants are looking for more than 75bp worth of rate cuts over the next 12-months, and we may see currency traders turn increasingly bearish against the high-yielding currency as the fundamental outlook for the $1T economy deteriorates.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2012/04/05/USD_Index_Looks_To_March_Highs_Ahead_Of_NFPs_AUD_Weakness_Ahead.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.