AUD/USD – Aussie Plunge Continues after Fed Says QE Reduction Likely

The Australian dollar continues to slide, following the news that the US Federal Reserve intends to scale back its QE program.  The Aussie is having a terrible week, and has lost over three cents against the surging US dollar. In Thursday's European session, AUD/USD is trading slightly above the 0.92 level. It’s a busy day in the US, with three key events on the schedule – Unemployment Claims, Existing Home Sales and Philly Fed Manufacturing Index. Today's sole release from Australia is the RBA quarterly bulletin.

There was plenty of movement in the currency markets 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 Fed announcement was bad news for the Aussie, which suffered sharp drops. The Australian dollar has now lost a remarkable 11 cents in less than three months.

On Tuesday, 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, and the situation has gone from bad to worse as the week progresses.

G8 summits are often photo-ops with little substance, as confident world leaders reiterate their commitment to take steps to improve the global economy. However, this year’s G8 meeting in Northern Ireland served more than the usual fare, as the G8 leaders used the occasion to announce the start of negotiations on a free trade agreement between the European Union and the United States. The stakes are very high – the EU and US produce 50% of the global output, and a third of world trade. The deal would be the largest bilateral trade pact ever, and could add up to $100 billion to the economies of each partner. Negotiations will get underway in Washington next month, with a deal expected to be signed by the end of 2014. A deal of such magnitude is bound to have an effect on the Australia's export sector, which is a critical component of the economy.

 

AUD/USD for Thursday, June 20, 2013

Forex Rate Graph 21/1/13
 

AUD/USD June 20 at 12:00 GMT

AUD/USD 0.9212 H: 0.9313 L: 0.9164

 

AUD/USD Technical

S3 S2 S1 R1 R2 R3
0.9000 0.9071 0.9135 0.9221 0.9328 0.9405

 

AUD/USD is down sharply on Thursday, as the Aussie's woes continue. On the upside, the pair is currently facing resistance at 0.9221. This is a weak line, and could  be tested if there is any correction to the pair's downward move. This is followed by resistance at 0.9328. On the downside, the pair is receiving support at 0.9135. This is followed by a support level at 0.9071. This line is protecting the all-important 0.90 level.

  • Current range: 0.9135 to 0.9221

 

Further levels in both directions:

  • Below: 0.9135, 0.9071, 0.9000, 0.8916 and 0.8747
  • Above: 0.9221, o.9328,  0.9405, 0.9541 and 0.9651

 

OANDA's Open Positions Ratio

AUD/USD ratio is back in action, pointing to movement towards long positions. Given the pair's sharp downward movement, this is to be expected, as many short positions have been covered. This has resulted in a higher percentage of open long positions. Long positions make up an overwhelming majority of the ratio, indicating that trader sentiment is strongly biased towards the pair undergoing a correction and moving upwards.

The Australian dollar continues to struggle after Bernanke's remarks that the Fed plans to tighten QE. There could be more volatility from the pair, as the US releases three key events later today. 

AUD/USD Fundamentals

  • 1:30 Reserve Bank of Australia Bulletin.
  • 12:30 US Unemployment Claims. Estimate 343K.
  • 13:00 US Flash Manufacturing PMI. Estimate 52.5 points.
  • 14:00 US Existing Home Sales. Estimate 5.01M.
  • 14:00 US Philly Fed Manufacturing Index. Estimate -0.6 points.
  • 14:00 US CB Leading Index. Estimate 0.2%.
  • 14:30 US Natural Gas Storage. Estimate 89B.

 

*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.