AUD/USD – Edges Lower as Markets Brace for Fiscal Cliff

AUD/USD has edged lower, as the pair is showing some movement in Monday’s trading. The pair briefly pushed across the 1.04 line in last Asian trading, but retracted back to the 1.0370 range. Although negotiations continue in Washington to reach a deal to avert the fiscal cliff, the likelihood of a last minute breakthrough before the January 1 deadline does not appear likely. US Market releases ended the year on a high note, as Pending Home Sales jumped 1.7%, well above the forecast of a 0.3% decline. As the markets wind down before taking a break for the New Year’s holiday, trading volumes remain thin. This has reduced liquidity and could result in increased volatility as we wind up 2012. In fundamental news, Australian Private Sector Credit was a disappointment, as it came in below the estimate. There are no scheduled releases out of Australia or the US on Monday.

In the US, the deadlock over fiscal cliff continues, despite a rare Sunday session of both the Senate and the House of Representatives. Despite the flurry of activity on Capitol Hill, there is still no progress to report in the fiscal cliff talks between the Republicans and the Democrats. Both sides remain far apart on the issues of tax increases and cuts to federal programs, with the Republicans reluctant to introduce any tax hikes and the Democrats against spending cuts in federal programs. The Republicans have blocked proposals to raise taxes on earners with incomes above $250,000, and the Democrats are dead set against any cuts to the Medicaid or Social Security programs.

Unless a dramatic breakthrough is announced on Monday, the US will go over the fiscal cliff, meaning that $US 650 billion dollars in tax hikes and spending cuts will come into effect on January 1st. This double-jab could rock the fragile US economy and stifle the nascent economic recovery. Without an agreement, investor confidence in the US economy could suffer, and credit rating agencies could respond negatively. Lawmakers on both sides have asked US vice-president Joe Biden to lend a hand and try to break the impasse. Senate Majority Leader Harry Reid said he is “hopeful but realistic”, but it’s doubtful if the markets are sharing his sentiment, with only hours left to reach an agreement to avert fiscal cliff.

In Australia, the Reserve Bank of Australia announced that Private Sector Credit showed no change from the previous month. The markets had anticipated a 0.3% increase. The aussie lost ground following this release, the last for 2012.

Back in the US, recent US economic releases typified what we saw throughout 2012 – a mixed bag of strong and weak data, making it difficult to put a finger on the direction of the US economy. Last week’s Unemployment Claims looked sharp, but Consumer Confidence fell to five-month low. New Home Sales failed to meet the estimate, but Pending Home Sales surprised the markets with a strong gain. Although there are signs that the US economy is improving, this zig-zagging makes it difficult to predict what to expect in early 2013.

AUD/USD for Monday, Dec 31, 2012

AUD/USD Dec 30 at 12:15 GMT

1.0369 H: 1.0409 L: 1.0367

AUD/USD Technical

AUD/USD has shown some movement in Monday’s trading. The pair broke through the 1.04 line, but has retracted, as the resistance line of 1.0424 remains in place. This line is strengthening as the pair loses ground. On the downside, the pair has broken through support at 1.0376. The next line of support is at 1.0334. With the markets marked by thin trading, traders can expect the pair to show more fluctuation.

Current range: 1.0376 to 1.0334.
Further levels in both directions:
• Below: 1.0334, 1.0230, 1.0174, 1.0080, 1.00, 0.9917 and 0.9815.
• Above: 1.0376, 1.0428, 1.0508, 1.0605, 1.0718 and 1.0874.

OANDA’s Open Position Ratios
The AUD/USD ratio continues to show an increase in open long positions. This trend began last week, and is an indication of expectations that the aussie will improve. Although the pair did briefly break above the 1.04 line, it was unable to sustain this move, and AUD/USD has edged downwards, and is back in the 1.0370 range.
Historically, the final trading week of the year is marked by reduced liquidity and thin trading as market operations wind down. All eyes are fixed on the fiscal cliff crisis, with only hours remaining before the US “goes over the cliff”. AUD/USD movement is closely tied to this fiscal crisis, and any new developments could have a major impact on the pair. Reports of a breakthrough, which is considered unlikely could weaken the US dollar, as the market’s appetite for risk grows. Conversely, if the deadline passes with no deal, market sentiment will fall and we could see a flight of capital to the safe-haven US dollar.

AUD/USD Fundamentals
• 00:30 Private Sector Credit. Estimate 0.0%. Actual -0.3%.
*Key releases are highlighted in bold
*All release times are GMT

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