AUD/USD – Steady after Recent Sharp Losses

The Australian dollar has stabilized in Friday trading, after sustaining sharp losses this week. The Aussie has lost over three cents this week against the surging US dollar. In Friday’s European session, the pair in trading in the mid-92 range. It’s a very quiet Friday, with no Australian or US releases on schedule. There was one key release today in China, as Flash Manufacturing PMI dropped to a seven-month low. The index fell to 48.3 points, its second straight reading below the 50-point level. This is a cause of concern since it indicates contraction in the Chinese Manufacturing sector. This could weigh on the Aussie, as weakness in China would likely reduce the demand for Australian exports to the Asian giant.

The Aussie plunged almost two cents on Wednesday, after Federal Reserve chair Bernard Bernanke said that QE would likely be scaled down in 2013, and could be terminated in 2014, if the economy continues to improve. The Fed said it expects the U.S. economy to grow between 2.3% and 2.6% this year, and unemployment should fall to between 6.5% and 6.8% by the end of 2014. This means that if the US economy shows stronger growth and unemployment falls, there is a strong likelihood that the Fed will scale down QE. It should be remembered that the Federal Reserve is not making any changes at present to QE, which involves bond purchases of $85 billion each month by the Federal Reserve. Bernanke’s comments boosted the dollar against the major currencies, since winding up QE is dollar-positive. The Australian dollar has now lost a remarkable 11 cents in less than three months.

Earlier this week, the Aussie took a tumble courtesy of the RBA, which released the minutes of its previous policy meeting. Policymakers left the door open for further rate cuts down the road, which would make the Australian dollar less attractive to investors. The RBA also stated that the Australian dollar could fall further due to weak demand for Australian exports. AUD/USD responded by shedding more than one cent after the RBA release.