USD Heavily Overbought, Aussie To Benefit From Higher Employment

By David Song, Currency Analyst

DJ FXCM Dollar Index

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9790.6	9816.62	9666.73	1.20	141.82%

The Dow Jones-FXCM U.S.Dollar Index (Ticker: USDollar) remains 1.20 percenthigher from the open after moving 142 percent of its average truerange, and the rebound from 9,454 may gather pace over theremainder of the week as the gauge finally clears resistance around9,800. As the shift away from risk-taking behavior gathers pace,the USD should continue to retrace the sharp reversal from 10,134,but we may see a short-term correction pan out over the next24-hours of trading as the greenback remains overbought. As the30-minute relative strength index falls back fromoverbought territory, we may see the reserve currency struggle tohold above 9,800, and the index may continue to face range-boundprice action over the near-term as market participants weigh thefundamental outlook for the global economy.As the USD continues totrade below the 50.0 percent Fibonacci retracement around 9,828, thenear-term rally may be coming to an end, but risk trends shouldcontinue to dictate price action for the major currencies as theeconomic docket remains fairly light for the rest of the week. Inturn, the developments coming out of the euro-area is likely toheavily influence the currency market, and the political shiftin Greece and Italy is poised to come underincreased scrutiny as European policy makers struggle to restoreinvestor confidence. As German Finance Minister Wolfgang Schaeublefloats the idea of Italy tapping the European Financial StabilityFacility, the heightening risk for contagion continues to dampenthe appeal of the single-currency, and we may see the EuropeanCentral Bank take additional steps to shore up the economy as theregion slips back into a recession. Indeed, there’sspeculation that the ECB will lower the benchmark interest rate to1.00% in December, but the Governing Council may have little choicebut to carry its easing cycle into 2012 as the downturn in growthcurbs the outlook for inflation. In turn, the EUR/USD looks poisedto extend the sharp reversal from 1.4246, and the euro may threatenthe rebound from 1.3145 as the fundamental outlook for Europe turnsincreasingly bleak.Three of the fourcomponents weakened against the greenback, led by a 1.84 percentdecline in the Australian dollar, but the high-yielding currencymay regain its footing over the next 24-hours of trading should thelabor report instill an improved outlook for the isle-nation.Australia is expected to add another 10.0K jobs in October followingthe 20.4K expansion in the previous month, and the data could sparka rebound in the AUD/USD as the data fosters a positive attitudefor future growth. However, market participants are looking foranother rate cut by the Reserve Bank of Australia according toCredit Suisse overnight index swaps, with investors pricing a 100percent chance for a 25bp rate cut at the next meeting on December6, and speculation for lower borrowing costs is likely to furtherweaken the high-yielding currency as the central bank turnsincreasingly cautious towards the economy. As a result, thereversal from 1.0752 should gather pace in the days ahead, and wemay see the exchange rate come up against the 38.2% Fib from the2010 low to the 2011 high around 0.9920-50 to test for near-termsupport.--- Written by David Song, Currency Analyst

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

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Original Article: http://www.dailyfx.com/forex/fundamental/us_dollar_index/daily_dollar/2011/11/09/USD_Heavily_Overbought_Aussie_To_Benefit_From_Higher_Employment.html

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