Technicals | Jul 27 2011
US Dollar Index Threatens Trend, AUD Eyes Record-High
By David Song, Currency Analyst
The Dow Jones-FXCM U.S. Dollar index extended the sharp reversal from earlier this month (9661.96), but we should see a correction over the next 24-hours of trading as price action approaches the lower bounds of the downward trending channel. The USD is 0.77% lower on the day after moving 137% of its average true range, and the greenback looks poised to recoup the losses from earlier this week as the relative strength index bounces back from oversold territory. In turn, the gauge should work its way back to the 9450.00 zone, but another leg lower would expose the yearly low at 9337.19. As fears surrounding a U.S. default dampens the appeal of the greenback, market participants may increase their search for an alternative to the reserve currency, and the Swiss franc and the Japanese Yen may continue to outperform as the low-yielding currencies benefit from the risk-off environment.
As price action clears the 78.6% Fibonacci retracement at 9428.74, the broader range between 9337.19-9764.97 may come into play, but we expect U.S. policy makers to come to an agreement in the days ahead give the broad reaching implications of a U.S. default. In turn, a resolution should spark a relief rally in the USD, but the details of the accord will certainly come under increased scrutiny as the world’s largest economy struggles to manage its ballooning budget deficit. A short-term fix may not be taken too well by market participants, and the coveted AAA credit rating may be lost, which could threaten the reserve status of the U.S. Dollar.
All four components rallied against the greenback on Tuesday, led by a 0.90% advance in the Australian dollar, and the high-yielding currency certainly looks poised to retrace the decline from the record-high (1.1011) as the central bank adopts an improved outlook for the region. Indeed , Reserve Bank of Australia Governor Glenn Stevens was less ‘gloomy’ towards the economy, saying that the shift in private consumption is a ‘point of optimism,’ and the central bank may see scope to normalize monetary policy further should the recovery gather pace. However, as the economic outlook remains clouded with high uncertainty, we are likely to see the RBA keep the benchmark interest rate at 4.75% throughout the remainder of the year, and the central bank may show an increased willingness to lower borrowing costs as monetary policy remains mildly restrictive.
The views expressed are not FNArena's (see our disclaimer).
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