AUD/USD – Loses Ground as Cyprus Worries Weigh on Markets

AUD/USD lost ground in Monday’s Asian session, following the announcement of a EUR10 billion euro bailout for Cyprus, a member of the Eurozone. The markets reacted negatively to the news that the rescue package included a one-time tax on deposits in Cyprus banks. The Australian dollar dropped following the bailout announcement, but has mostly recovered in the European session, as the pair trades slightly below the 1.04 line. In economic releases, the US posted some strong figures last week, but the week ended on a sour note, as manufacturing and consumer confidence numbers fell well below expectations. On Monday, Australian New Motor Vehicle Sales pushed out of negative territory, coming in at a flat 0.0%. The markets will be keeping a close eye on Tuesday’s release of the minutes of the RBA’s most recent Monetary Policy Meeting Minutes. Today’s only US release is the NAHB Housing Market Index.

Monday has seen a lot of volatility in the currency markets following the announcement of the Cyprus bailout. The agreement was reached over the weekend between the EU, IMF and the Cypriot government. The bailout includes an unusual provision of a one-time tax on bank deposits, which is expected to raise 5.8 billion euros, covering more than half of the 10 billion euro bailout. Although Cyprus does not boast a large economy, there was concern that if the country went into bankruptcy, the contagion could affect the entire Eurozone and reignite the debt crisis. In return for the bailout, Cyprus has agreed to trim its deficit, consolidate its banking sector and raise taxes. The markets reacted negatively to the announcement, reflecting a fear that the tax on deposits could lead to bank runs in other Eurozone countries struggling with high debts, further destabilizing the zone.

There is little worry about bank runs in the US, but the health of the economy and pace of recovery continues to weigh on the markets. After excellent US employment and retail sales numbers earlier in the week, Friday’s releases were a big disappointment. The well-respected UoM Consumer Sentiment dropped to 71.8 points, well off the estimate of 78.2 points. The Empire State Manufacturing Index also lost ground, falling to 9.2 points, and missed the estimate of 9.8 points. There was some positive news, as Industrial Production was higher, rising 0.7%. This beat the estimate of 0.4%. The markets will be keeping a close eye on this week’s Federal Reserve policy meeting, which is often a market-mover and could affect the direction of AUD/USD.

The markets are keeping a close eye on developments in Japan. The powerful Bank of Japan will welcome its new governor next week, as Parliament approved the nomination of Haruhiko Kuroda, who has left his position as head of the Asian Development Bank. Kurudo’s appointment will likely lead to further monetary easing in Japan, as the new governor has repeatedly said that the BOJ must take more action to raise inflation in order to breathe some life in a listless Japanese economy. In addition to Kuroda, Parliament approved the nominations of Kikuo Iwata and Hiroshi Nakaso as deputy chiefs at the central bank. Kuroda is seen as an ally of Prime Minister Abe, who has made eliminating deflation in the economy a top priority. Kuroda has pledged to reach the BOJ’s inflation target of 2% within two years, and the markets are expecting more monetary easing as soon as Kuroda takes over. So, traders can expect quite a bit of activity from USD/JPY. The Japanese currency has plunged 20% against the dollar since November, and further monetary easing will likely result in an even weaker yen, which is not good news for Australia, whose export sector is having a tough time.

 

AUD/USD for Monday, March 18, 2013

Forex Rate Graph 21/1/13
 

AUD/USD March 18 at 13:00 GMT

1.0392  H: 1.0399 L: 1.0344

 

AUD/USD Technical

S3 S2 S1 R1 R2 R3
1.0174 1.0230 1.0334 1.0424 1.0568 1.0605

 

AUD/USD has shown strong movement in Monday trading, displaying sharp moves in both directions. The pair is receiving support at 1.0334. Given the volatility the pair is showing, this line cannot be considered safe. There is stronger support at 1.0230. On the upside, there is resistance at 1.0424. This is a weak line, and could be tested if the Aussie posts further gains. The next resistance line is at 1.0568, which has not been tested since January.

Current range: 1.03334 to 1.0424

 

Further levels in both directions:

  • Below: 1.0334, 1.0230, 1.0174, 1.0080 and 1.00
  • Above: 1.0424, 1.0568, 1.0605 and 1.0697

 

OANDA’s Open Position Ratios

The AUD/USD ratio is not showing any activity in Monday trading. This is not reflective of the movement by the pair, which started the week with losses, but has mostly recovered. If the pair’s volatility continues, look for the ratio to swing into action as well.

AUD/USD has started the week with strong movements in both directions, and is currently testing the 1.04 line. The catalyst for this volatility has been the Cypriot bailout, which includes a provision for a tax on all bank deposits. We could see the pair’s volatility continue, as the markets wait for the RBA to release minutes of its last policy meeting.

 

AUD/USD Fundamentals

  • 12:35 Australian New Motor Vehicle Sales. Actual 0.0%
  • 14:00 US NAHB Housing Market Index. Estimate 48 points

 

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

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.