Currencies | May 20 2011
By David Song, Currency Analyst
The USD regained its footing during the North American trade, with the Dow Jones-FXCM index paring the overnight decline to 9628.65, and the rebound should gather pace as risk aversion flows back into the currency market. The dollar index remains 0.03% lower on the day after moving 62% of its average true range, but the gauge looks poised to push higher going into the end of the week as it continues to trade within the upward trending channel from earlier this month. In turn, the USD looks poised to test 9800.00 in the days ahead, and the reserve currency may appreciate further in the following month as currency traders scale back their appetite for yields.
Indeed, the batch of dismal data coming out of the world’s largest economy weighed on market sentiment, and the recent developments may encourage the Federal Reserve to retain a wait-and-see approach in the third-quarter as the central bank aims to foster a sustainable recovery. However, heightening price pressures could lead the FOMC to lift the benchmark interest rate off the record-low later this year, and interest rate expectations are likely to play an increased role in driving price action for the USD as the committee starts to draw up an exit strategy. According to Credit Suisse overnight index swaps, investors see borrowing costs in the U.S. rising by more than 25bp over the next 12-months, and interest rate expectations should gather pace in the second-half of the year as the central bank expects economic activity to accelerate over the coming months. In turn, the recent rebound in the greenback could ultimately turn into a larger wave of U.S. dollar strength, and Fed Chairman Ben Bernanke may soften his dovish tone for future policy as growth and inflation picks up.
The rebound in the index was led by a decline in the Japanese Yen and the Australian dollar, but the high-yielding currency may depreciate further over the next 24-hours of trading as risk sentiment continues to dictate price action in the currency market. Meanwhile, the Reserve Bank of Australia is widely expected to maintain its wait-and-see approach heading into the second-half of the year, and the central bank may adopt a less hawkish outlook for monetary policy as the risk for inflation subside. As consumer inflation expectations weaken for the fourth consecutive month in May, wage growth is likely to slow further in 2011, and the RBA may see scope to keep the benchmark interest rate at 4.75% for the remainder of the year as the fundamental outlook for the global economy remains clouded with high uncertainty. In turn, the AUD/USD looks as though it has carved out a top this month, and the exchange rate should continue to trend lower over the near-term as it appears to be trading within a descending triangle.
The views expressed are not FNArena's (see our disclaimer).
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