The markets have been pricing in continued weakness for the US dollar today opposite its riskier major counterparts, including the Australian dollar, on speculations that the Federal Reserve will announce an expansion of its asset purchases program today. Demand for risk is fueling the financial markets and higher-yielding assets are expected to yield gains.
A risk rally has been directing market movement as economists anticipate the Fed will add Treasury purchases to an existing program that buys $40 Billion in mortgage bonds each month. Reports that Athens was able to meet its bond buyback target are also pushing the demand for risk. Further, a jump in German investor confidence this December has likewise provided support for the increase in the demand for higher-yielding investments.
A Bloomberg survey of economists states that the Federal Open Market Committee will announce a decision to amplify record accommodation in monthly Treasury buying that will push its balance sheet to almost $4 Trillion. The central bank is scheduled to end Operation Twist this month. The program swaps $45 Billion of short-term Treasuries each month for longer-term government debt, keeping the total size of the balance sheet unchanged. The monetary policy panel pledged in October to continue that plan until the labor market improves “substantially.”
While these speculations have spurred the Aussie to rise to a two-month high, a lift in iron-ore price forecast for 2013 is perceived to further aid the appreciation. The Australian Bureau of Resources and Energy Economics stated in a report today that prices will average A$106 a metric ton in 2013, compared with a September estimate of A$101 a ton. Prices are set to average A$128 a ton in 2012 from A$126 a ton forecast in September, and Australia could likely ship 481 million tons in 2012 and 543 million tons in 2013, from 483 million tons and 528 million tons predicted in September. Expectations that infrastructure projects and stimulus spending by China, the world’s biggest buyer of iron-ore and Australia’s primary trade partner, will boost demand led to the forecast revision.
With these in mind, a buy bias can be considered for the AUDUSD today. Technical price corrections are likely, especially as the price index is already signaling an overbought position.
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