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USD Outlook Remains Bullish- AUD to Falter on Dovish RBA

USD Outlook Remains Bullish- AUD to Falter on Dovish RBA

2013-05-06 15:30:00
David Song, Strategist
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Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10515.76

10523.23

10472.3

0.37

99.22%

Forex_USD_Outlook_Remains_Bullish-_AUD_to_Falter_on_Dovish_RBA_body_ScreenShot207.png, USD Outlook Remains Bullish- AUD to Falter on Dovish RBA

Chart - Created Using FXCM Marketscope 2.0

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is trading 0.36 percent higher from the open after moving 97 percent of its average true range, and the bullish sentiment surrounding the greenback may gather pace over the near to medium-term as the Federal Reserve appears to be slowly moving away from its easing cycle. Although the overbought signal on the 30-minute relative strength index foreshadows a short-term correction over the next 24-hours of trading, we may have an opportunity to buy into the USD strength as the 10,400 figure continues to provide support. As the USDOLLAR breaks out of the downward trending channel, an inverse head-and-shoulders appears to be taking shape, and the short-term rebound may gather pace in the days ahead should we see a growing number of Fed officials adopt a more neutral to hawkish tome for monetary policy.

Forex_USD_Outlook_Remains_Bullish-_AUD_to_Falter_on_Dovish_RBA_body_ScreenShot208.png, USD Outlook Remains Bullish- AUD to Falter on Dovish RBA

Although the FOMC stands ‘prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation,’ the central bank continued to highlight the pickup in private sector activity, and we may see a greater discussion to scale back on quantitative easing as the world’s largest economy gets on a more sustainable path. In turn, the Fed may slowly move away from its easing cycle during the second-half of the year, and the committee may start to lay out a tentative easing strategy in the coming months as the outlook for growth improves. As the relative strength index comes off of support (41), we may see the bullish flag pattern finally play out in the days ahead, and we should see the dollar make fresh highs as the fundamental developments coming out of the U.S. dampens the outlook for more Fed support.

Forex_USD_Outlook_Remains_Bullish-_AUD_to_Falter_on_Dovish_RBA_body_ScreenShot209.png, USD Outlook Remains Bullish- AUD to Falter on Dovish RBA

The greenback rallied across the board, led by a 0.78 percent decline in the Australian dollar, and the higher-yielding currency may struggle to hold its ground over the next 24-hours of trading should the Reserve Bank of Australia (RBA) show a greater willingness to push the benchmark interest rate to a fresh record-low. Although the RBA is widely expected to keep the benchmark interest rate at 3.00 percent, market participants are still looking for 50bp worth of rate cuts over the next 12-months according to Credit Suisse overnight index swaps, and Governor Glenn Stevens may have little choice but to carry out the easing cycle throughout 2013 in an effort to encourage a stronger recovery. As the new government in China – Australia’s largest trading partner – moves away from its export-driven market, the end of the resource boom should continue to dampen the outlook for growth and inflation, and we may see the RBA surprised the market with a rate cut as data coming out of the $1T economy disappoints. In turn, we may see the AUDUSD continue to give back the rebound from March (1.0114) and the pair may work its way back towards parity as we approach the turn of the year amid the deviation in the policy outlook.

--- Written by David Song, Currency Analyst

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

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