Both Sides Of The USD Story

The use of the Usd as a Reserve currency - one that is used to hold in reserve to back the printing of regional notes - has increased again this year, as central banks look to the U.S. Treasury note as a very viable product to own that pays a rate of return way above the U.S. overnight interest rate, and at a rate that only Australia can match out of the major-pair economic regions.

The move into high-yielding 10-year Treasury notes that are bought and held in Usd denominations is a major reason why the dollar index has been able to so easily hold support, even at a time that risk and equity markets are also on the long side of things. That in itself reveals a market that is thin on opportunity, low on speculative interest, and low on available leverage to easily hold a speculative position for the long haul.

The constant quest by investors for positive yield differentials, in a global market that is very thrifty right now in regard to what is paid out, both overnight and on the short end of the yield curve, has left the Usd with few peers on the days that equity markets move sideways or lower. It is also a main reason as to why the major pairs are struggling to break free of 4-Hour and Daily charts that are currently very range-bound.

The current urge by market participants to be long the Usd is driven by a lack of commercial lending (still), overseas sovereign debt issues, the need to be in the relative safety of U.S. Treasuries despite the fiscal challenges that the Fed faces.

The fact that any sustainable global economic recovery may well require the U.S. economy to be expanding a rate that forces the U.S. to increase interest rates is another reason that volatility is rife, and can be seen in the mad rush to re-align near-term valuations when red-flag economic releases are issued.

Forex trade in 2010 has been dominated by global equity moves that lost 6% values in January, and then gained it all back in the subsequent months. The variable has been that the dollar index has been gaining hard on days that equities drop, and yet also finding buyers of Usd-based Treasuries on the days that equities move higher.

It is a rare situation that happens at the peak, or trough in this case, of a global business cycle, and reflects the thirst that global investors have to gain a yield advantage, in a market environment that offers overall low rates, and volatile intra-day rebalancing moves.

Australian Rates
The Reserve Bank of Australia raised the official Cash Rate by 25 basis points on Tuesday, as expected, but the Aud/Usd exchange rate had a negative reaction to the bank rate statement, dropping 50 pips in the following minutes.
The sell-off was caused by the last paragraph of the statement, which said, that the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today's decision, rates for most borrowers will be around average levels.

This points out that the central bank will stop raising rates for the time being, temporarily ending the tightening cycle. Similar comments were made by the RBA Governor Glenn Stevens two weeks earlier, saying that interest rates are close to the average level of the last decade, and are consistent with the bank target.
The recent rate hike is the sixth in a row since October 09, in which the Australian dollar together with the Canadian dollar have been the only two currencies that have not lost ground to the Usd. The A$ valuations received a lot of thelp from the RBA during these six rate hikes, but still failed to push above the 0.9300 for seven consecutive months.

The interest rate differential between Australian rates and those from other regions was off-set by commodity markets, that make up a huge part of Aud valuations, have been stuck in a seven month price channel that canoe be broken. The question now is whether the existing high rtaes from Australia will be enough to draw in the speculative players looking for current yield, over potential growth from other regions.
The 100-pip channel between the 20 and 50-Day Simple Moving Averages at 0.9275 and 0.9175 will be pivotal for aussie valuations. A daily chart close above or below neither one will indicate the likely direction of trade in the near-term.

Commodity and equity markets moving higher will create a compelling reason to think that 0.9300 may be challenged on Aud/Usd, and conversely a failure for both markets to move up will put downwards pressure on the pair.
The sideways chop that is very reactive to macroeconomics continues, and traders need to be very much aware that most of the near-term forex price action will be around the regional open and closes of equity trade, and at the times that red-flag releases hit the calendar. Until the Daily chart channels break, a reduction in lots and near-term targets may be key.

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