AUD/USD – Little Activity as Markets Eye US Fed Announcement

In Wednesday trading, AUD/USD is showing little movement, as it trades in the 1.0370 range. It is a quiet today as far as economic releases. Today’s highlight is the US Federal Reserve’s interest rate announcement, as it wraps up its March policy meeting. There are no releases out of Australia today.

On Tuesday, the Reserve Bank of Australia released the minutes from its most recent Monetary Policy Meeting. The RBA noted that the economy is responding well to low interest rates, and it plans to continue with an accommodative monetary policy. At the last meeting, the RBA kept its benchmark interest rate at 3.0%, and stated that the impact of policy easing needed to be maintained. The minutes stated that global economic conditions have improved, but the high Australian dollar continues to weigh on the economy. In a sign that the Cyprus bailout crisis is affecting global repercussions, Deputy Governor Philip Lowe weighed in on the bailout agreement, saying that the tax on bank deposits was a “step back” for the Eurozone and could lead to more financial instability, since the result could be a run on the banks by nervous depositors in other countries which may need bailout packages.

The epicenter of this week’s financial news is, of all places, Cyprus. One of the smallest members of the Eurozone, the island country is struggling, and thought it had concluded a bailout agreement (worth 10 billion euros) over the weekend with the EU and the IMF. However, a controversial provision in the bailout agreement has enraged Cypriots and sent the currency markets spinning. Under the terms of the bailout package, deposit holders in Cypriot banks would be levied with a one-time tax, between 6.7% and 9.9%, depending on the size of the deposit. This tax is intended to raise 5.8 billion euros, which would be a condition to receiving the 10 billion euro bailout. There was a run on bank machines, as Cypriot banks were closed for a holiday. Taxing bank deposits is unusual, and there is a fear that other debt-ridden countries, such as Spain, could face bank runs as well. The drama continued on Tuesday, as the Cypriot parliament voted overwhelmingly against the bailout deal, despite the government’s pleas that rejecting the agreement could lead to a bank collapse. In an attempt to contain the fallout, Eurozone finance ministers are likely to meet today to discuss options following the vote in parliament.

In Japan, the powerful Bank of Japan has replaced governors, and the move is sure to have significant ramifications for the Japanese economy and currency. Haruhiko Kuroda, the incoming governor, is a strong proponent of monetary easing, and has been called a “dream choice” for Prime Minister Shinzo Abe, who wants to see further monetary easing in order to eliminate deflation and increase government spending. Abe has been a sharp critic of Shirakawa, the outgoing governor, who did not favor aggressive monetary easing. Kuroda has set a goal of 2% inflation within two years, and is expected to introduce additional easing, which will likely weaken the yen. The Japanese currency has already lost 20% against the US dollar, which has been a boon for Japanese exports. Although economic indicators continue to point to deflation in the economy, GDP was up slightly in Q4 of 2012, raising hopes that the government’s aggressive easing policy is starting to pay dividends.

Overshadowed by the crisis over the Cyprus bailout, the US Federal Reserve wraps up a policy meeting on Wednesday. The Fed is expected to maintain ultra-low interest rates, but the markets will be anxiously awaiting to see what the Fed decides regarding the current round of QE. With the US recovery looking stronger and unemployment dipping lower, there has been speculation that the Federal Reserve might wind down or modify its asset purchase program. However, Fed head Bernard Bernanke and other senior officials have said the current round of QE will continue until the US recovery deepens. If the Fed surprises the markets, we could see some volatility from AUD/USD.

AUD/USD for Wednesday, March 20, 2013

AUD/USD March 20 at 12:35 GMT

1.0379 H: 1.0393 L: 1.0355

AUD/USD Technical

AUD/USD is showing little change in Wednesday trading. The pair is receiving support at 1.0334. This is a weak line, and could be tested if the Australian dollar loses ground. The next support level is at 1.0230. On the upside, there is resistance at 1.0424. This line could also see activity if the pair pushes higher. This is followed by resistance at 1.0568, which has remained intact since mid-January.

Current range: 1.0334 to 1.0424

Further levels in both directions:

• Below: 1.0334, 1.0230, 1.0174, 1.0080 and 1.00
• Above: 1.0424, 1.0568, 1.0605 and 1.0697

OANDA’s Open Position Ratios

The AUD/USD ratio has shifted, pointing to movement towards long positions. The currency pair did edge upwards earlier, but has retracted, and is showing very little net movement in Wednesday trading. If the ratio continues to point towards long positions, this would signify an expectation for the Australian dollar to improve against the US currency. 

AUD/USD is having an uneventful week so far, as the pair trades in the high-1.03 range. Will we see a breakout? Today’s highlight is the US Federal Reserve Monetary Policy Statement, and the markets will be monitoring what the Fed has to say about the health of the US economy. We could see the pair show some volatility, depending on the market’s reaction to the Fed’s announcement and follow-up press conference.

AUD/USD Fundamentals

• 14:30 US Crude Oil Inventories. Estimate 1.8M
• 18:00 US FOMC Economic Projections
• 18:00 US FOMC Statement
• 18:00 US Federal Funds Rate. Estimate <0.25%
• 18:30 US FOMC Press Conference

*Key releases are highlighted in bold

*All release times are GMT

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