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USDOLLAR Getting Overbought- AUD to Struggle Amid RBA Policy

USDOLLAR Getting Overbought- AUD to Struggle Amid RBA Policy

David Song, Strategist

Index

Last

High

Low

Daily Change (%)

Daily Range (% of ATR)

DJ-FXCM Dollar Index

10679.57

10694.76

10658.49

0.21

65.27%

Forex_USDOLLAR_Getting_Overbought-_AUD_to_Struggle_Amid_RBA_Policy_body_ScreenShot231.png, USDOLLAR Getting Overbought- AUD to Struggle Amid RBA Policy

Chart - Created Using FXCM Marketscope 2.0

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.21 percent higher from the open after trading 65 percent of its average true range, and the bullish sentiment surrounding the greenback may gather pace over the near to medium-term as the fundamental developments coming out of the world’s largest economy dampens the Fed’s scope to expand the balance sheet further. However, as there appears to be a bearish divergence in the 30-minute relative strength index, the dollar looks poised for a near-term correction, and we may see a move back towards the 10,600 figure to test for support. Nevertheless, we will maintain our game plan to buy dips in the greenback amid the shift in the policy outlook, and the dollar remains poised to appreciate throughout 2013 as a growing number of Fed officials adopt a more neutral to hawkish tone for monetary policy.

Forex_USDOLLAR_Getting_Overbought-_AUD_to_Struggle_Amid_RBA_Policy_body_ScreenShot232.png, USDOLLAR Getting Overbought- AUD to Struggle Amid RBA Policy

In light of the ongoing improvement in the U.S. economy, Kansas City Fed President Esther George, the lone dissenter on the FOMC, warned that the ballooning balance sheet may complicate the central bank’s exit strategy, and argued that the highly accommodative policy stance raises the risk of higher long-term inflation expectations. However, as a New York Fed survey warns of tight credit conditions restraining growth for small businesses, the FOMC remains poised to carry its highly accommodative policy stance into the second-half of the year, but we may see a growing number of Fed officials start to discuss a tentative exit strategy in the coming months as the recovery gradually gathers pace. Nevertheless, as the relative strength index approaches overbought territory, we may see a short-term correction in the days ahead, but we will maintain a bullish outlook for the greenback as it continues to carve a series of higher highs paired with higher lows.

Forex_USDOLLAR_Getting_Overbought-_AUD_to_Struggle_Amid_RBA_Policy_body_ScreenShot233.png, USDOLLAR Getting Overbought- AUD to Struggle Amid RBA Policy

The greenback continued to rally across the board, led by a 0.54 percent decline in the Australian dollar, and the higher-yielding currency may persistently give back the rebound from the previous year as the Reserve Bank of Australia (RBA) continues to embark on its easing cycle. According to Credit Suisse overnight index swaps, market participants still see the RBA lowering the benchmark interest rate by another 25bp over the next12-months, and bearish sentiment surrounding the aussie may gather pace in the coming months as Governor Glenn Stevens continues to strike a dovish tone for monetary policy. As the AUDUSD fails to find support around parity, the pair looks poised for a move back towards the 23.6 percent Fibonacci retracement from the 2011 high to low around 0.9780-90, but we will need to keep a close eye on the relative strength index as it pushes deeper into oversold territory.

--- Written by David Song, Currency Analyst

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

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