Australian Dollar Hits Fresh Monthly High, Japanese Yen Loses Ground Across the Board

The Australian dollar advanced against its U.S. counterpart for the second-day to reach a fresh monthly high of 0.8999, and is currently the best-performing currency against the greenback on Tuesday. The AUD/USD remains 100pips higher on the day after moving nearly 96% of its ATR, and we may see the exchange rate continue to retrace the decline from earlier this month as price action holds above the 50-Day SMA at 0.8990. However, as the advance remains overbought, we may see the aussie-dollar fall back going into the Asian session and fill-in the gap from the 120-SMA at 0.8890 as investors expect the Reserve Bank of Australia to keep rates on hold at its next policy meeting in March. Credit Suisse overnight swaps show investors are pricing a 28% chance for a 25bp rate hike after projecting a 47% probability during the previous week, and the pullback in interest rate expectations may continue to drag on the exchange rate as the central bank assesses the impact of the record rate hikes during the fourth quarter of 2008.

The Japanese Yen extended the decline from the previous week following a rise in risk appetite, and the low-yielding currency may continue to retrace the advance from earlier this month as risk trends continue to dictate price action in the foreign exchange market. The USD/JPY is slightly higher on the day after paring the overnight decline, and looks poised to test the 50-Day SMA (90.60) this week as price action holds above the 100-Day SMA at 90.11. However, as the 30-minute RSI crosses into overbought territory, we may see a corrective retracement going into the Asian trade as the pair maintains the narrow range carried over from the previous week, but a break above the 2/12 high (90.43) is likely to expose the 50-Day SMA.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com