AUD/USD – Aussie Struggles as Inflation Numbers Disappoint

The Australian dollar continues to lose ground on Friday. At the start of the North American session, AUD/USD is struggling as it trades just above the 0.89 line. Australian PPI, a key indicator, was a major disappointment, hitting a five-month low. Meanwhile, US releases continued to look sharp, as Unemployment Claims and ISM Manufacturing PMI both beat their estimates by wide margins. On Friday, there are two major releases out of the US – Non-Farm Employment Change and the Unemployment Rate. As well, FOMC member James Bullard addresses a finance conference in Boston

The Australian dollar has had a miserable week, dropping over 300 points against the US currency. The Aussie did not get any relief from Australian Producer Price Index (PPI), as the key inflation index dropped from 0.3% to 0.1%, its worst showing since April. The markets had anticipated a solid gain of 0.5%. Earlier in the week, Commodity Prices and Import Prices both posted poor readings. Weakness in both import and export prices are certainly an unwelcome mix, and points to weakness in demand for imports and trouble in the Australian export sector.

It’s the opposite story over in the US, which has been humming with some strong releases since Wednesday. The all-important Unemployment Claims sparkled, as the indicator posted its lowest figure since May, at 326 thousand. This was a sharp drop from the previous reading of 343 thousand, and easily surpassed the estimate of 346 thousand. Not to be outdone, ISM Manufacturing PMI climbed from 50.9 to 55.4 points, its best performance since May 2011. These strong releases came on the heels of Advance GDP and ADP Non-Farm Payrolls, which looked very sharp as well. The US dollar has responded with broad gains against the major currencies.

Earlier this week, RBA Governor Glenn Stevens was in the news, stating that there was further room for an interest rate reduction next week. Stevens complained about low business confidence, the end of the mining boom and even criticized the government for not providing a specific date for the election. This is not the first time that Stevens has made comments which have impacted on the currency markets, and his comments about a possible rate reduction resulted in more pressure on the struggling Australian dollar. Analysts are saying there is a strong likelihood that the RBA will take action and lower rates, probably to 2.50%.

The Federal Reserve released a policy statement earlier this week, but there were no dramatic announcements from the US central bank. As expected, the Fed said it would maintain the present levels of QE, which involves $85 billion in asset purchases each month, and gave no indication about when it might scale down QE. There has been talk that the Fed could taper QE as early as September, and the speculation and uncertainty will likely cause volatility in the markets as long as the Fed doesn’t show its cards and keeps the markets in the dark. The Fed gave the US economy a cautious thumbs-up, noting that the economy was growing at a “modest” pace. However, it did voice concern about a possible rise in inflation.

AUD/USD for Friday, August 2, 2013

AUD/USD August 2 at 13:15 GMT

AUD/USD 0.8906 H: 0.8967 L: 0.8880

AUD/USD Technical

AUD/USD continues to lose ground, and has dipped below the 0.89 line in both the Asian and European sessions. AUD/USD is receiving support at 0.8844. Given the sharp drops we are seeing from the Aussie, this line cannot be considered safe. This line has held since August 2010. 0.8747 is the next support level.

On the upside, the pair faces weak resistance at 0.8916. This is followed by resistance at the round number of 0.9000. This line has strengthened as the Australian dollar continues to drop lower.

• Current range: 0.8844 to 0.8916

Further levels in both directions:

• Below: 0.8844, 0.8747, 0.8578 and 0.8467.
• Above:0.8916, 0.9000, 0.9089, 0.9135, 0.9221 and 0.9328

OANDA’s Open Positions Ratio

AUD/USD ratio has reversed directions from what we saw on Thursday and is pointing to movement towards long positions on Friday. Given the sharp drops we’re seeing from the pair, many short positions have been covered, resulting in an increase in open long positions. We could see this movement towards long positions continue if AUD/USD loses more ground.

The Aussie is flirting with the 0.89 and remains under strong pressure from the surging US dollar. Will AUD/USD continue to lose ground? We could see further volatility from the pair, as the US releases two key employment releases later in the day.

AUD/USD Fundamentals

• 1:30 Australian PPI. Estimate 0.5%. Actual 0.1%.
• 12:30 US Non-Farm Employment Change. Estimate 184K.
• 12:30 US Unemployment Rate. Estimate 7.5%.
• 12:30 US Average Hourly Earnings. Estimate 0.2%.
• 12:30 US Core PCE Price Index. Estimate. 0.1%.
• 12:30 US Personal Income. Estimate 0.5%
• 12:30 US Personal Spending. Estimate 0.5%.
• 14:00 US Factory Orders. Estimate 2.3%.
• 16:15 US FOMC Member James Bullard Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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