AUD/USD – Under Pressure As Italy Faces Deadlock

AUD/USD is showing some volatility in Tuesday trading, as the pair struggles to remain above the 1.02 line. In Italy, parliamentary elections failed to produce a clear winner, as politicians and pundits try to make sense of the results. The prospect of extended political uncertainty in the Eurozone’s third largest economy is making the markets jittery, and we could be in for a period of volatility until the political puzzle gets sorted out. In the US, New Home Sales and Consumer Confidence both sparkled, easily beating their estimates. The markets will be monitoring testimony by Fed chair Bernard Bernanke, who is testifying before the US Senate Banking Committee. There are no Australian releases on Tuesday.

Italian elections are traditionally boisterous and colorful events, and the results of this election certainly didn’t disappoint in that regard. The 5-Star Movement, which was largely a protest movement run by Beppe Grillo, a former comic, shocked pundits by winning the most votes. Grillo’s party now becomes the key to any chance of forming a coalition. The Center-left bloc, headed by Pier Luigi Bersani, won a majority in the lower house of parliament, but there was no clear winner in the upper house. This leaves the country in a political stalement, as any coalition cannot govern without forging a majority in both houses. Prime Minister Monti’s centrist bloc fared poorly at the polls, reflecting widespread voter dissatisfaction with the former Prime Minister’s severe austerity measures. The deadlock represented a worst-case scenario for the markets, which is concerned that political instability in Italy could affect the entire Eurozone.

The Reserve Bank of Australia has left the door open for more interest rate cuts, and this theme was reiterated by RBA Assistant Governor Guy Debelle, who stated on Monday that the high value of the Australian dollar was weighing on the Australian economy. Debelle hinted that the central bank would take monetary action “to counterbalance the pressures of an elevated exchange rate”. With the RBA setting a new interest rate next week, we could see the Aussie lose ground if the markets feel that the RBA will make good on their threat and cut rates. 

In the US, the Federal Reserve will again be in the market spotlight on Tuesday, as Federal Reserve Chair Bernanke testifies before the US Senate Banking Committee. Recently, the Fed released the minutes of its most recent FOMC meeting. The minutes indicated that policymakers had discussed slowing or even stopping the current round of QE before the US employment situation improves, which was an about-face in the Fed’s stance. Previously, the Federal Reserve had stated that it would not terminate the current round of QE before the US unemployment rate fell to 6.5%. Bernanke will likely be questioned about this issue at the hearing, and we could see some fluctuations in EUR/USD, depending on the markets’ reaction to Bernanke’s testimony.

AUD/USD for Tuesday, Feb 26, 2013

AUD/USD Feb 26 at 18:25 GMT

1.0225 H: 1.0292 L: 1.0200

AUD/USD Technical

AUD/USD remains under pressure, as it trades in the low-1.02 range. The pair is testing the 1.0230 line, which has already seen activity in Tuesday trading. There is stronger resistance at 1.0334. On the downside, 1.0174 is the next support level. This is followed by support at 1.0080, protecting the all-important parity line.

• Current range: 1.0174 to 1.0230

Further levels in both directions:

• Below: 1.0174, 1.0080, 1.00 and 0.9948
• Above: 1.0230, 1.0334, 1.0424, 1.0568 and 1.0605

OANDA’s Open Position Ratios

The AUD/USD ratio has swung into action, with movement towards long positions. We are not seeing this movement reflected in the pair, with the Aussie struggling to remain above the 1.02 line. However, the movement in the ratio and the fact that the long positions enjoy a commanding majority is indicative of a strong bias towards AUD/USD undergoing a correction and moving upwards.

AUS/USD remains under pressure, and the uncertainty in Italy will be of no help to riskier assets such as the Australian dollar. The Aussie did get some relief from very strong US data on Tuesday, as an improving US economy will give investors more confidence to move away from the safe-haven greenback in favor of currencies such as the Australian dollar.

AUD/USD Fundamentals

• 14:00 US S&P/CS Composite-20 HPI. Estimate 6.7%. Actual 6.8%.
• 14:00 US HPI. Estimate 0.6%. Actual 0.6%.
• 15:00 US CB Consumer Confidence. Estimate 60.8 points. Actual 69.6 points.
• 15:00 US Fed Chairman Bernard Bernanke Speaks. Bernanke will testify on the Semiannual Monetary Policy Report before the Senate Banking Committee.
• 15:00 US New Home Sales. Estimate 381K. Actual 437K.
• 15:00 US Richmond Manufacturing Index. Estimate -4 points. Actual 6 points.

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