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DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.80 percent lower from the open after moving 132 percent of its average true range, but we should see the greenback regain its footing over the following week as it remains oversold. As the recovery in the U.S. gradually gathers pace, the economic docket for the week ahead is expected to reinforce an improved outlook for future growth, and the developments may prop up the greenback as the rise in private sector activity limits the Fed’s scope to conduct another large-scale asset purchase program. Nevertheless,we may see the relative strength index sit in oversold territory as market participation thins ahead of the weekend, but we expect to see a rebound in the index once the oscillator pushes back above 30.

Indeed, the economic docket for the following week is expected to show U.S. Non-Farm Payrolls increasing another 150K in December, but the FOMC policy meeting minutes due out on Tuesday could prop up the greenback should the central bank continue to soften its dovish tone for monetary policy. As the Fed carries its wait-and-see approach into 2012, we should see the central bank stick to ‘Operation Twist’, and the committee may look to conclude its easing in the following year as the economic recovery gradually gathers pace. However, as the sovereign debt crisis continues to drag on the world financial system, Fed Chairman Ben Bernanke may keep the door open to expand monetary policy further, and the central bank head may look to further expand the balance sheet in order to shield the world’s largest economy. As we continue to see a bearish divergence in the relative strength index, dovish comments from Mr. Bernanke could trigger a selloff in the index, but the dollar should appreciate further in 2012 as the fundamental outlook for the U.S. improves.

All four components advanced against the greenback, led by a 1.19 percent rally in the Australian dollar, but the recent strength in the high-yielding currency is likely to be short-lived as market participants expect to see lower borrowing costs in the isle-nation. According to Credit Suisse overnight index swaps, investors see the Reserve Bank of Australia lowering the cash rate by more that 100bp over the next 12-months, and interest rate expectations may deteriorate further next year as the slowdown in global trade casts a dour outlook for future growth. As the AUD/USD remains capped by the 23.6 percent Fibonacci retracement from the 2010 low to the 2011 high around 1.0370-1.0400, the short-term rebound in the exchange rate should taper off in the days ahead, and we expect the aussie-dollar to carve out a lower low in January as the fundamental outlook for Australia turns increasingly weak.

source form: dailyfx

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