AUD/USD – Aussie Loses Ground Following Fed Taper Announcement

The Australian dollar lost ground on Wednesday, losing close to one cent against its US counterpart. This sharp drop followed the announcement that the US Federal Reserve would begin tapering its QE program by $10 billion, commencing in January. AUD/USD has recouped some of these losses on Thursday, as it trades in the mid-0.88 range in the European session. Taking a look at Thursday’s events, the only Australian release is the RBA Bulletin. The markets will have plenty of US data to analyze, with three key releases on today’s schedule – Unemployment Claims, Existing Home Sales and the Philly Fed Manufacturing Index.

After months of hesitation, Federal Reserve Chairman Bernard Bernanke finally played his hand on Wednesday. At its policy meeting, the Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, and AUD/USD lost close to 80 points, as it slumped to a low of 0.8823, its lowest level in over three years.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Overshadowed by the Fed’s bombshell announcement, a two-year, bipartisan budget agreement is  sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.

Over in Australia, on Tuesday the RBA released the minutes from its last policy meeting, and there wasn’t much good news as far as the Aussie was concerned. The Bank stated that a lower value for the currency would likely be required to “achieve balanced growth”. The RBA continues to try and “talk down” the Australian dollar, which has now shed about 12% of its value in 2013. The minutes noted that the RBA was maintaining interest rates but did not want to close off the possibility of a reduction if this could boost growth. Later in the day, RBA Governor Glenn Stevens reiterated that the Bank wants to see a cheaper Australian dollar. Testifying before a parliamentary committee, Stevens said that an exchange rate “over a dollar or even in the 90s” was not sustainable. He added that the RBA was open to reducing rates if conditions warranted such a move, and the possibility of a rate cut could weigh on the struggling Australian dollar.

AUD/USD for Thursday, December 19, 2013

AUD/USD December 19 at 12:20 GMT

AUD/USD 0.8823 H: 0.8876 L: 0.8823

AUD/USD Technical

• AUD/USD has rebounded in Thursday trading. The pair fell to a low of 0.8823 late in the Asian session but has since moved higher.
• 0.8893 has reverted to a resistance role following Wednesday’s losses by the Aussie. This is followed by a resistance line at the key round number of 0.9000.
• On the downside, 0.8735 is providing support. The next support level is 0.8658, which has remained intact since July 2010.
• Current range: 0.8735 to 0.8893

Further levels in both directions:

• Below: 0.8735, 0.8658, 0.8505 and 0.8411.
• Above: 0.8893, 0.9000, 0.9119, 0.9229 and 0.9305

OANDA’s Open Positions Ratio

AUD/USD ratio is showing gains in long positions in Thursday trading. This is reflected in the current movement of the pair, as the Australian dollar has reversed directions and posted modest gains. The ratio is made up of a substantial majority of long positions, reflecting a trader bias towards the Australian dollar continuing to move higher.

The Australian dollar remains under pressure as it trades at multi-year lows against the US dollar. With the US releasing three key events, including Unemployment Claims, we could see some sharp movement from the pair during the North American session.

AUD/USD Fundamentals

•  00:30 RBA Bulletin.
•  13:30 US Unemployment Claims. Estimate 336K.
• 15:00 US Existing Home Sales. Estimate 5.04M.
• 15:00 US Philly Fed Manufacturing Index. Estimate 10.3 points.
• 15:00 US CB Leading Index. Estimate 0.7%.
• 15:30 US Natural Gas Storage. Estimate -260B.

*Key releases are highlighted in bold

*All release times are GMT

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