Aussie Posts Largest Gains on RBA Tone, Calming Greek Worries

Fundamental Headlines

• U.S. Housing Starts Fall to Three-Month Low – Bloomberg

• Bank of China Halts FX Swaps with some European Banks – Reuters

• Italy Credit Downgraded, French Banks Pressured – Reuters

• More EU Banks ‘May Need’ Recapitalization – WSJ

• SEC Probes Trades Ahead of S&P Cut to U.S. Rating – WSJ

European Session Summary

Despite a risk-averse environment very much still in place, with the Japanese Yen and the U.S. Dollar among the best performing currencies, the Australian Dollar was the strongest major in the overnight. Following the Reserve Bank of Australia’s Board minutes from their most recent meeting, the Aussie was well-bid throughout the European session as the report was less dovish than expected. Governor Glenn Stevens noted in particular that diminishing interest rate expectations might be a bit overdone, part of the reason that the Aussie has slid so quickly in recent weeks. As the highest yielding major currency, the Aussie easily succumbs to interest rate speculation.

AUD/USD 5-minute Chart: September 20, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Markets are now bracing for what could be an exceptionally volatile two-day period on Tuesday and Wednesday, circulating around the North American trade session. Greek Finance Minister Evangelos Venizelos said that he held “productive” discussions with European Union officials on Monday, and another conference call is scheduled for Tuesday. Greece appears to be running out of funds, again, and an insolvent Greece would unleash a Lehman Brothers-esque liquidity crunch in Europe. Central bankers have already stepped up efforts to prevent such an occurrence. Last week, the Federal Reserve announced it would conduct liquidity swap operations with the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.

With the Federal Open Market Committee policy meeting beginning today, a watershed moment for the U.S. Dollar is looming on Wednesday. Markets and risk in general have ticked higher in recent weeks on speculation that the Federal Reserve will announce the third round of quantitative easing at their meeting. Such a move, based on how the Greenback performed during QE2, would devalue the Dollar further. However, if no further easing is announced, then the U.S. Dollar looks to perform well for the remainder of the year. Overall market direction should become clearer after Wednesday as such.

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is slightly lower, trading at 9788.36, at the time this report was written, after opening at 9799.73. The index has traded mostly lower, with the high at 9809.63 and the low at 9735.98.

24-Hour Price Action

Key Levels: 13:30 GMT

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX