AUD/USD – Aussie Flies Higher Following Fiscal Cliff Deal

AUD/USD responded to the fiscal cliff agreement in the US by climbing sharply, as the pair was up by about one full cent on Wednesday. Had Congress failed to reach a deal, tax hikes and spending cuts worth $650 billion would have automatically kicked in, and there were fears that this double-jab would push the US economy into recession. Although the deal is only temporary and does not deal with the budget ceiling or spending cuts, it does provide some short-term certainty, which is positive for market sentiment. US markets are back in action after the New Year’s Day holiday. Chinese Manufacturing PMI, remained unchanged at 50.6 points, slightly below the estimate of 51.0 points.

Key Chinese data is significant and can affect the movement of AUD/USD, since China is Australia’s number one trading partner. In Australia, AIF Manufacturing Index was up slightly, to 44.3 points. However, the manufacturing sector remains in a slump, as the index has been below the 50.0 threshold since February. There was some positive news as the Commodity Prices indicator recorded a smaller decline for a second straight month. The index dropped by 8.0%, its best result since May. Is the hard-hit Australian export sector finally turning the corner as we begin 2013? In the US, there are several releases, highlighted by ISM Manufacturing PMI.

With the eyes of the world glued on Washington, US lawmakers managed to hammer out an agreement on fiscal cliff on January 1. After intense negotiations, Congress pulled out all the stops and managed to cobble together a last minute agreement, as the US narrowly missed going over the fiscal cliff. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide. The deal appears to be the lowest-common denominator that Republicans and Democrats could agree on, and the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and the fiscal cliff agreement simply delays spending cuts until that time. With Republicans and Democrats far apart on these issues, we could see another fiscal cliff crisis erupt next month.

Taking a look at recent US releases, 2012 ended with much of what we saw throughout the year – 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 zigzagging makes it difficult to predict what to expect in early 2013.– 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 Thursday, January 2, 2012

AUD/USD January 2 at 12:55 GMT

1.0492 H: 1.0499 L: 1.0390

http://fxtrade.oanda.com/labsds/graph/AUD_USD_2012-01-01_2d_m.png

S3 S2 S1 R1 R2 R3
1.0334 1.0376 1.0424 1.0508 1.0605 1.0718


AUD/USD has taken full advantage of the fiscal cliff deal, and has climbed just shy of the 1.05 line. The resistance line of 1.0508 is holding for now, but the pair could break through in the North American session. On the downside, 1.0424 is the next line of support. This line has strengthened as AUD/USD trades close to 1.05.

Current range: 1.0424 to 1.0508.
Further levels in both directions:
• Below: 1.0428, 1.0376, 1.0334, 1.0230, 1.0174, and 1.0080.
• Above: 1.0508, 1.0605, 1.0718 and 1.0874.

OANDA’s Open Position Ratios
With the sharp climb by the Australian dollar against its US counterpart, the AUD/USD ratio has changed, with a significant increase in short positions. With the aussie hovering around the 1.05 line, trader sentiment is almost evenly split on what direction the pair will favor. Look for the ratio makeup to continue to change if there is further movement by AUD/USD.
The dollar is broadly lower following the fiscal cliff deal, as market sentiment has improved and investors feel more comfortable with riskier assets, such as the Australian dollar. We could see the aussie make more gains as the markets continue to digest the news of the fiscal cliff agreement.

AUD/USD Fundamentals
• 5:30 Commodity Prices. Actual -8.0%.
• 14:00 US Final Manufacturing PMI. Estimate 53.2 points.
• 15:00 US ISM Manufacturing PMI. Estimate 50.2 points.
• 15:00 US Construction Spending. Estimate 0.6%.
• 15:00 US ISM Manufacturing Prices. Estimate 51.4 points.

*Key releases are highlighted in bold
*All release times are GMT

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.

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Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.