After a break for the Christmas holidays, the markets are back in action as we wrap up 2012. After its recent slump, AUD/USD has leveled off, and is trade in a narrow range around 1.0370. The final trading week of the year tends to be uneventful but with the fiscal cliff talks going right down to the wire, traders should be prepared for some volatility in the currency markets. On Thursday, there are three key releases out of the US – Unemployment Claims, CB Consumer Confidence, and New Home Sales. There are no scheduled Australian releases this week.
After a short Christmas break, Congress reconvenes on Thursday and the tough negotiations over fiscal cliff will continue. After all the finger-pointing and tough rhetoric over the past few months, it’s crunch time in Washington. If the Democrats and Republicans don’t find some common ground, tax hikes and spending cuts worth some $650 billion will go into effect on January 1. This double-jab could send the economy reeling and push the US into a recession in 2013. Can the two sides hammer out an agreement? The markets are hoping that at the very least, some type of stop-gap measure can be reached before the deadline. This would provide some breathing room while negotiations for a comprehensive deal continue, and hopefully calm down the jittery markets. What does the fiscal crisis mean for AUD/USD? An agreement would likely be dollar negative, as investors would feel more comfortable taking more risk. Conversely, if there are no signs of progress, market sentiment will sour and investors will flock to the safety of the US dollar.
In Australia, market sentiment soured last week after the RBA’s December Bulletin, which predicted that weak growth will extend into 2013. The main factors for the pessimistic forecast were decreased investment in the mining sector, high labor costs and the strong Australian dollar. This pessimistic prognosis added to the Australian dollar woes, with the currency sustaining a sharp drop since mid-December. In another development, the China Beige Book, which provides data and analysis of the Chinese economy, pointed to some economic difficulties. The report noted that the housing and manufacturing sectors remain strong, but new loans and exports remain weaker than expected. This could have some impact on the Australian dollar, as China is Australia’s number one trading partner.
In fundamental highlights, there were two releases out of the US on Wednesday. The S&P/CS Composite-20 HPI, an important housing inflation index, continued its recent upward swing, with an excellent 4.3% gain. However, the Richmond Manufacturing Index dropped to 5 points, well below the market forecast of 12 points. On Thursday, there are three key US releases – Unemployment Claims, CB Consumer Confidence, and New Home Sales. The markets will be hoping for a repeat of last week’s strong US data. However, developments in the fiscal cliff crisis could have a much greater impact on the currency markets than this week’s economic releases. In Australia, there are no scheduled releases this week. The next release is Private Sector Credit, which will be published on Monday.
AUD/USD for Thursday, Dec 27, 2012
AUD/USD Dec 27 at 11:00 GMT
1.0376 H: 1.0380 L: 1.0347
AUD/USD remains rangebound in quiet trading. The pair continues to test the support line of 1.0376, which has seen activity throughout the week. There is stronger support for the pair at 1.0334. On the upside, 1.0424 has held steady since last week. The next resistance line is at 1.0508.
Current range: 1.0376 to 1.0424.
Further levels in both directions:
• Below: 1.0376, 1.0334, 1.0230, 1.0174, 1.0080, 1.00, 0.9917 and 0.9815.
• Above: 1.0428, 1.0508, 1.0605, 1.0718 and 1.0874.
OANDA’s Open Position Ratios
Trader sentiment continues to shift towards long positions, with a majority of traders in this camp. This indicates that there are growing expectations that we will see a correction after the aussie’s earlier losses and a push higher by AUD/USD.
Historically, the final trading week of the year is marked by reduced liquidity and thin trading as market operations wind down. The main news item this week will continue to be the fiscal cliff crisis, as Congress reconvenes with only a few days left to reach a deal. AUD/USD movement is closely tied to fiscal cliff, and any new developments could have a major impact on the pair. Although the pair has been quiet, that could change if there is news out of Capitol Hill. Reports of an agreement could weaken the US dollar, as the market’s appetite for risk grows. Conversely, if the crisis deepens, investors would likely show a preference for the safe-haven US dollar.
• 13:30 US Unemployment Claims. Estimate 365K.
• 15:00 US CB Consumer Confidence. Estimate 70.3 points.
• 15:00 US New Home Sales. Estimate 382K.
*Key releases are highlighted in bold
*All release times are GMT
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