The U.S dollar has kicked off the week broadly higher against major counterparts following unsettling news from the Euro region over the weekend. After a brief reprieve last week, the focus has once again turned to Greece's plight to regain economic composure with market participants now concerned Greece may not meet their fiscal targets in order to receive the next bailout installment. The risk-off trade appears to be in full swing at the expenses of risk currencies with the out-of-form Aussie dollar losing over 1 percent on the day. The local unit followed the Euro lower in earlier trade but is now leading losses coinciding with weakness from local and Asian equity markets.
All eyes this week will be squarely on the FOMC who are due to reconvene for a special two-day meeting on Tuesday. While investors anticipant no change to interest rates, the primary focus will be on the Fed's plans to boost economic growth and whether this may include another round quantitative easing or indeed another form of stimulus dubbed 'operation twist'. This essentially involves the divestment from the Fed's short term securities using the proceeds to invest in longer dated securities - in turn acting to flatten the yield curve to bring down longer term mortgage rates. In theory this acts to stimulate the ailing U.S housing market. While we expect 'stimulus with a twist' to have little negative implications for the greenback, if we should see a third round of quantitative easing in its traditional form, this will further dilute the already plentiful supply of the US dollars - thus promoting broad based greenback losses. With underlying inflation at the top end of the Fed's target, the question remains can the Fed's inflation hawks win out against members willing take further unconventional measures to resuscitate the economy?
With the local calendar light on economic feedback, the Aussie dollar will no doubt be at the mercy of global sentiment with both the FOMC and feedback from the Euro-zone primary directives. All eyes will however be on the RBA minutes due for release on Tuesday, HSBC Chinese PMI data to be released on Wednesday with the Conference board leading index on Friday. From a technical perspective, we expect further losses on the local unit to be contained around key support of 101.8 US cents in the short-term. Clearly the Aussies on the back foot here - although a barrage of negative themes from the Euro-zone in conjunction with an even odds chance the Fed may disappoint this week could see the Aussie sink further towards parity. At the time of writing the Aussie dollar is buying 102.4 US cents.