AUD/USD – Aussie Edges Higher, Testing 1.05

AUD/USD has edged higher in Monday’s trading. The pair has crossed above the significant 1.05 level. The pair has crossed over the 1.05 line, and is nearing the levels it reached following last week’s fiscal cliff agreement. There are no releases out of the US on Monday, and only one out of Australia, the AIG Construction Index. This index has been mired in the mid-30 point range, reflecting a weak construction sector. The markets are not anticipating any significant change in the upcoming release.

Market sentiment was positive following the fiscal cliff agreement, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

Taking a look at fundamentals, Friday’s US employment numbers brought no surprises. Non-Farm Employment Change rose to 155 thousand, which was slightly above the estimate of 150K. The Unemployment Rate edged up from 7.7% to 7.8%. However, the November rate was revised to 7.8%, so there was actually no change. ISM Non-Manufacturing climbed to 56.1 points, its best reading since March. This easily beat the estimate of 54.2 points. In Australia, AIG Construction Index will be released later on Monday. This index has been mired in the mid-30 point range, reflecting a contracting construction sector. The markets are not anticipating any significant change in the upcoming release. Analysts will be paying more attention to Australian Trade Balance, which will be released on Tuesday. The monthly deficit grew larger in December, and an unexpected reading could affect the movement of AUD/USD.

Meanwhile, a report by a respected US economist, Harry Dent, says that Australia could fall into a recession in 2014, if Europe is unable to solve its debt crisis. The Australian economy is already hurting from the global slowdown, and if China, which is Australia’s number one trading partner, experiences an economic slowdown, this will mean less demand for Australian raw materials, such as copper and iron-ore. Underscoring this point, Australian Commodity Prices have been in free-fall, and has been posting declines since May. However, there was some positive news from last week’s release, as the decline of 8.0% was smaller than the previous reading. Dent added that an economic slowdown would lead to an increase in bad business loans, which would in turn hurt the banking sector’s profits and could lead to a drastic drop in housing prices.

AUD/USD for Monday, January 7, 2013

AUD/USD January 7 at 11:40 GMT

1.0495 H: 1.0513 L: 1.0468

AUD/USD Technical

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

AUD/USD has started the new trading week with gains, and is testing the 1.05 line. The proximate support and resistance lines (R1 and S1 above) remain in place from last week. The pair is putting pressure on the resistance line of 1.0508. This line was temporarily breached on Monday, and could see further activity. On the downside, 1.0424 continues to provide strong support.

Current range: 1.0424 to 1.0508.

Further levels in both directions:
• Below: 1.0424, 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 Australian dollar improving last week against its US cousin, the AUD/USD ratio has shown movement in favor of short positions. There is a slight bias in favor of short positions, as long positions continue to be filled. With the aussie putting pressure on the 1.05 line, trader sentiment is almost evenly split on what we could see next from the pair. If the AUD/USD continues to move higher, we can expect the increase in the percentage of short positions to continue to increase.
The Australian dollar is edging higher, and we could see it continue to make modest gains against the US dollar.

AUD/USD Fundamentals

• 22:30 AIG Construction Index

*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.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in several major online financial publications including, Seeking Alpha and FXStreet. Based in Israel, Kenny has been a MarketPulse contributor since 2012.
Kenny Fisher

Latest posts by Kenny Fisher (see all)