AUD/USD – Under Pressure as S&P Cuts Aussie Credit Rating Outlook

The Australian dollar is showing little movement on Thursday, following strong gains in the Wednesday session. AUD/USD is trading slightly above the 0.75 line. In economic news, Australia’s credit rating outlook was downgraded by Standard & Poor’s. The AIG Construction Index showed little change, posting a reading of 53.2 points. Over in the US, employment data will be in focus, with the publication of ADP Nonfarm Employment Change and Unemployment Claims. On Friday, we’ll get a look at the all-important Nonfarm Employment Change, with the markets expecting a strong turnaround after the May shocker of just 38 thousand. The estimate stands at 174 thousand.

There were no surprises from the RBA on Tuesday, as the central bank maintained the benchmark rate at 1.75%. The markets had not anticipated any monetary moves, as Australians went to the polls just last week. The election remains inconclusive and it may take several more days of political jockeying before a new government takes shape. Back in May, the RBA lowered interest rates following a soft CPI release in the first quarter. Analysts are keeping a close eye on July 27, when the CPI report for the second quarter will be released. The RBA will hold its policy meeting one week later, and a weak CPI release could be the catalyst for a rate cut. Meanwhile, Standard & Poor’s downgraded the outlook on Australia’s AAA credit rating from stable to negative. The credit agency cited lingering uncertainty over the inconclusive Australian election, and warned that the country’s credit rating was in jeopardy if Australia didn’t get its fiscal house in order. The Australian dollar posted slight losses after the S&P move but then recovered.

The Federal Reserve released the minutes of its June policy meeting on Wednesday. Policymakers expressed concerns about a slowdown and hiring and the health of the US economy, and the underlying tone was one of prudence and caution. The June meeting took place just one week before Britain voted to leave the EU, which has caused turmoil in the markets and sent bond yields to record lows. The minutes indicated that Fed members projected two rate increases before the end of the year, but that forecast is likely out-of-date following the shock waves from Brexit. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. However, if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike will certainly increase.

Fed Chair Janet Yellen and her colleagues continue to sound cautious about the US economy, and the financial instability caused by Brexit could delay any rate hikes until 2017. The US economy is in good shape, but the Fed hasn’t raised rates since last December and is unlikely to seriously consider any rate hikes unless employment and inflation numbers point upwards. Although Yellen recently said that Brexit would have an impact on the US, San Francisco Federal Reserve President John Williams seemed to disagree with that assessment. On Tuesday, Williams said that the US markets had reacted to Brexit as expected, and the impact on the US economy would be much smaller than the euro crisis of 2011-2012. Is Brexit having an impact on the Fed’s monetary stance? We may get an answer to that question when the Fed meets again for a policy meeting on July 26-27.

AUD/USD Fundamentals

Wednesday (July 6)

• 19:30 Australian AIG Construction Index. Actual 53.2

Thursday (July 7)

• 7:30 US Challenger Job Cuts. Actual -14.1%
• 8:15 US ADP Nonfarm Employment Change. Estimate 158K
• 8:30 US Unemployment Claims. Estimate 269K
• 10:30 US Natural Gas Storage. Estimate 42B
• 11:00 US Crude Oil Inventories. Estimate -2.1M

Upcoming Key Events

Friday (July 8)

• 8:30 US Average Hourly Earnings. Estimate 0.2%
• 8:30 US Nonfarm Employment Change. Estimate 174K
• 8:30 US Unemployment Rate. Estimate 4.8%

*Key releases are highlighted in bold

*All release times are EDT

AUD/USD for Thursday, July 7, 2016

AUD/USD July 7 at 7:35 EDT

Open: 0.7513 Low: 0.7462 High: 0.7539 Close: 0.7514

AUD/USD Technical

• AUD/USD has been choppy in the Asian and  European sessions, but is unchanged
• 0.7472 was tested earlier in support and is a weak line
• 0.7612 is a strong resistance line
• Current range: 0.7472 to 0.7612

Further levels in both directions:

• Below: 0.7472, 0.7339, 0.7251 and 0.7160
• Above: 0.7612, 0.7739 and 0.7835

OANDA’s Open Positions Ratio

AUD/USD ratio has showed slight gains in short positions on Thursday. Long and short positions are close to an even split, indicative of a lack of trader bias as to what direction AUD/USD will take next.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.