AUD/USD – RBA Issues Pessimistic Report, Budget Deficit Expected

AUD/USD lost ground after the Reserve Bank of Australia issued a negative report. In its monthly bulletin, the RBA forecast weak growth in 2013. The main factors for the pessimistic forecast were continuing weakness in the mining sector, high labor costs and the strong Australian dollar. There was more bad news from down under, as the government announced that it was revising its earlier forecast of a budget surplus for the fiscal year ending in June, 2013. One reason for the budget shortfall is falling commodity prices. Australia is highly dependent on export revenue, but this sector has taken a beating due to weak global demand. The aussie edged down following the disappointing news, and has fallen just below the 1.05 line.

In the US, the markets have toned down their optimism over the fiscal cliff negotiations, as the gridlock on Capitol Hill Continues. The Republicans and Democrats continue to dig in and blame each other for the crisis, but recent polls indicate that a majority of Americans think that the Republicans need to be more flexible in their positions, especially regarding tax hikes on the wealthy. The Republicans are well aware of public sentiment, and have softened their positions and their rhetoric.

However, there is still a significant gap between the sides as far as tax hikes and the extent of spending cuts to Federal programs. The Republicans have offered tax hikes on individuals earning more than $1 million, but the Democrats want to extend these hikes to earners above $250,000. Clearly frustrated, Republican House Leader John Boehner has warned that if the President Obama doesn't show more flexibility, he will be “responsible for the largest tax increase in American history.” With the fiscal cliff deadline fast approaching as we near the end of 2012, we could see further volatility from AUD/USD, as the markets react to the latest developments concerning progress on this issue.

Taking a look at fundamentals, there are no scheduled Australian releases for the remainder of the week. In the US there was good news for the US housing sector, as Building Permits beat the forecast, climbing to 0.90 million in November. This was the indicator's highest level since August 2008. Housing Starts was down slightly, but within the markets estimate. Existing Home Sales will be released later on Thursday, and the markets are expecting a strong increase from the previous reading. If the indicator can meet or beat the forecast, this would point to further improvement in the US housing sector, which has gone through difficult times and is critical to a sustained economic recovery.

Today's other key releases out of the US are Unemployment Claims and the Philly Fed Manufacturing Index. Unemployment Claims are expected to rise, which would be bullish for the dollar. The Philly Fed Manufacturing Index had an awful reading for October, coming in at -10.7 points. Another decline is expected, although much smaller, with the estimate standing at -2.2 points. Traders should pay attention to today's three US key releases, as any unexpected readings (either below or above the market estimate) could affect the movement of AUD/USD.

1.0487 H: 1.0499 L: 1.0465

USD/AUD Technical

AUD/USD is under pressure following weak economic reports out of Australia. This week's trend has been downwards in direction, with the pair dropping below the psychologically important line of 1.05. The pair is receiving support at 1.0458, which has weakened as the pair trades at lower levels. We could see activity around this line if the aussie continues to weaken. 1.0408, protecting the round number of 1.04, is stronger. On the upside, there is resistance at 1.0534, followed by 1.0598.

Current range: 1.0458 to 1.0534
Further levels in both directions:
• Below: 1.0458, 1.0408, 1.0350, 1.0264, 1.0170, 1.0044 and 1.00.
• Above: 1.0534, 1.0598, 1.0654, 1.0720 and 1.0831.

OANDA's Open Position Ratios
Trader sentiment is pointing to a bias in favor of short positions. This indicates an expectation that the Australian dollar will continue to lose ground. The recent trend appears to support this position, as AUD/USD has dropped close to one cent in the past week. If the pair continues to drop towards the mid 1.04 range, we may see a modification in the ratio and an increase in favor of long positions.

As the markets digest the RBA's disappointing report and the news of a budget shortfall, we could see further downward movement by AUD/USD. Traders should also keep a close eye on the fiscal cliff in the US, as developments in Congress could affect the movement of USD/AUD. Reports of progress towards an agreement could weaken the dollar, as the market's appetite for risk grows. Conversely, if the crisis deepens, investors will likely seek the safety provided by the US dollar.

USD/AUD Fundamentals
• 12:30 Royal Bank of Australia Bulletin.
• 13:30 US Unemployment Claims. Estimate 358K.
• 13:30 US Final GDP. Estimate +2.8%.
• 13:30 US Final GDP Price Index. Estimate +2.7%.
• 15:00 US Existing Home Sales. Estimate 4.88M.
• 15:00 US Philly Fed Manufacturing Index. Estimate -2.2 points.
• 15:00 US CB Leading Index. Estimate -0.2%.
• 15:00 US HPI. Estimate +0.2%.
• 15:30 US Natural Gas Storage. Estimate -73B.

*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.