USD Index To Track Broader Trend, AUD Threatened By RBA Rate Cut

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.08 percent higher from the open as market participants scale back their appetite for yields, and the shift away from risk-taking behavior may prop up the dollar over the remainder of the week as the reserve currency continues to benefit from safe-haven flows. At the same time, the slew of central bank rhetoric on tap for later today may increase the appeal of the USD as Fed officials take note of the more robust recovery, and we may see U.S. policy makers strike an improved outlook for the world’s largest economy as the region gets on a more sustainable path. However, the lack of momentum to push back above 10,000 certainly casts a bearish outlook for the greenback, and we may see the index make another run at 9,900 as the downward trending channel takes shape.

As the Fed projects a stronger recovery for 2012, we should see central bank officials continue to curb expectations for another large-scale asset purchase program, and the FOMC may continue to lay the groundwork to start normalizing monetary policy later this year as growth and inflation pick up. As the USDOLLAR maintains the upward trending channel from earlier this year, we will preserve our bullish forecasts for the greenback, and we should see the reserve currency track higher ahead of the next FOMC meeting on April 25 as interest rate expectations gather pace. According to Credit Suisse overnight index swaps, market participants have begun to price a rate hike for the next 12-months, and the shift in rate expectations should push the dollar higher as the Fed looks to conclude its easing cycle in 2012.

Three of the four components weakened against the greenback, led by a 0.44 percent decline in the Australian dollar, and the high-yielding currency should continue to give back the advance from earlier this year as it maintains the downward trend carried over from the previous month. At the same time, market participants see a 93 percent chance for a 25bp rate cut at the May 1 meeting according to Credit Suisse overnight index swaps, and the weakening outlook for the $1T economy is likely to exacerbate the bearish sentiment underlining the AUDUSD as it carves out a major top in 2012. As the downward trend in the relative strength index reinforces our bearish forecast for the aussie-dollar, we should see the pair continue to give back the advance from earlier this year, and we may see the exchange rate revert back towards the 38.2 percent Fibonacci retracement from the 2010 low to the 2011 high around 0.9930-50 as it searches for support.

--- Written by David Song, Currency Analyst

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