Market Overview

AUD/USD Lower as Fiscal Cliff Weighs on Market Sentiment

AUD/USD fell sharply on Friday (Dec. 21), dropping to the 1.04 line, as market fallout continues due to the continuing impasse over the fiscal cliff crisis in the US. The markets also continue to react negatively to the RBA's December Bulletin, which was pessimistic about the country's growth prospects in 2013. In an odd twist, the Australian government appeared to reverse its position and stated that the country could post a budget surplus in the 2012-2013 budget. AUD/USD is steady in Monday trading, and continues to test the 1.04 line. There are no scheduled releases out of Australia or the US on December 25 or 26.

As the end of 2012 fast approaches, the markets are becoming increasingly nervous about the fiscal cliff crisis, as the clock continues to tick down before a series of automatic tax hikes and spending cuts automatically kick in. With Republicans and Democrats far apart on how to tackle spending cuts and tax hikes, the fiscal cliff negotiations in Congress are gridlocked, as each side continues to attack and blame the other for the impasse.

There were some red faces on the Republican side last week, as Republican House Leader John Boehner threatened to pass a “Plan B” that would have avoided tax hikes for all Americans earning less than $1 million per year. In the end the motion was withdrawn to due lack of support on the Republican side. The Republicans took a gamble on Plan B, hoping that it would put the ball back in the Democrat's court, and embarrass the White House if it went ahead and vetoed the motion. In the end, it was House Leader Boehner who looked bad, as Plan B turned out to be a futile political maneuver.

Meanwhile, Congress is adjourned until December 27, just days before the fiscal cliff kicks in. Will the lawmakers get their act together this week, or will we “go down the cliff” into 2013? The crisis could have a major impact on the markets, and we could see the often volatile AUD/USD show some movement if there are any developments out of Capitol Hill before New Year's.

Back in Australia, market sentiment soured 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. There was an odd twist as Trade Minister Craig Emerson stated that a budget surplus in 2012-2013 was possible. This seemed to contradict remarks last week by Treasurer Wayne Swan, who said that the country would likely post a deficit next year due to weaker exports and lower company profits, which had resulted in a negative impact on tax revenue. The aussie lost ground following Treasurer Swan's bleak outlook, but failed to bounce back after the Trade Minister's more optimistic outlook.

USD/JPY for Thursday, Dec 21, 2012

AUD/USD Dec 24 at 11:55 GMT

1.0416 H: 1.0407 L: 1.0389

USD/AUD Technical

S3 S2 S1 R1 R2 R3
1.0230 1.0334 1.0376 1.0424 1.0508 1.0605

 

AUD/USD remains under pressure following a sharp drop late last week. The pair is testing the 1.04 line, with weak resistance at 1.0424. This line could be tested if the pair makes a move upwards. On the downside, 1.0376 is also weak, as the pair approached this level earlier on Monday, before bouncing back above 1.04. So, we could see activity around either of the proximate support and resistance levels (S1 and R2).

Current range: 1.0326 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
Following a sharp drop by AUD/USD at the end of last week, trader sentiment has shifted, with a very slight bias in favor of long positions. This indicates that many short positions were filled as the aussie lost ground. With the ratio close to an even split, traders remain closely divided on which direction we can expect the pair to take.
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. AUD/USD movement is closely tied to fiscal cliff, and developments in Congress could have a major impact on the pair. With only a few days left until the end of 2012, any news out of Capital Hill could result in volatility by the pair. Reports of progress towards an agreement could weaken the US dollar, as the market's appetite for risk grows. Conversely, if the crisis deepens, investors show a preference for the safe-haven US dollar.

USD/AUD Fundamentals
• There are no scheduled releases from the Eurozone or the US on Monday.

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