Fiscal Cliff Averted… Low Ceiling Ahead
Brief Summary:
• Markets came back online after the holiday season to find the Fiscal Cliff narrowly avoided and risk assets rallying on the news. Volumes were light and it didn’t take long for upcoming U.S. Employment data to briefly end the positive flurry. AUDUSD rallied to a high of 1.0528 before settling into a trading range characterised by support at 1.0480 and resistance at 1.0520. AUDEUR gained 1.5 cents from a low of 0.7858 to a high of 0.8061. AUDGBP also made gains from a low of 0.6383 to 0.6544 at time of writing.
• Australia’s Trade Balance was released yesterday at -2.64 billion. The figure measures the value of imports less exports and was slightly lower than expected. Australia’s trade balance declined steadily throughout 2012 as a strong AUD encouraged imports, and coupled with softer commodity prices, reduced the value of exports. The AUD reaction was fairly muted as markets look abroad for direction.
• Australian Retail Sales Growth for November was released today at -0.1% growth for the month. The disappointing figure caused the AUD to sell off sharply, although remaining above key support levels. AUDUSD bid towards 1.0520 throughout the morning leading into the figure and dropped 30 points on release. Broader market sentiment seemed to wash out any reaction as it did with the Trade Balance figure.
• China’s trade balance will be released on Thursday. A strong surplus figure suggests Chinese exports remain strong and may boost the AUD. China’s Consumer Price Index, a measure of consumer inflation, will also be released on Friday.
The Fiscal Cliff Deal
• The U.S. Fiscal Cliff spoiled the holiday break for many as negotiations between the White House and House Republicans dragged on. The uncertainty caused markets to dip for the final half of December as the reality set in that a deal may not be reached.
• The December dip in the AUD is apparent below, followed by a sharp recovery on New Year’s Day. The holiday season’s light volumes delivered choppy trading for the first week of 2013. AUDUSD seems to have resumed its early December trajectory, although markets are less optimistic given the lacklustre achievements of the Fiscal Cliff deal.
• •The U.S. had technically gone over the cliff by the time a deal was reached at 2am on New Year’s Day. Following the initial jubilance, market commentators delved into the fine print, quickly pointing out the shortcomings of the deal. The Economist labelled it “European moment” citing the lack of real progress other than tax rate increases.
• In the end, Republicans folded to Obama’s terms and taxes rose from 35% to 39.6% on wealthy individuals earning more than USD 450,000. The issue was the crux of Obama’s election winning campaign and unlikely to ever be overthrown. Taxes on estates, capital gains and dividends also rose; however remain lower than pre-Bush levels. Most importantly, tax hikes on the wealthy are an ideological victory for the administration and a push in the right direction for the country.
• Nothing was done, however, about the debt ceiling that may be hit as early as February. Obama had intended for the debt ceiling increases to be included in the deal. Nor was a deal made regarding the Sequester; automatic spending cuts triggered by the Budget Control Act of 2011. Originally, the Sequester was meant to occur on January 1st, but has been delayed by 2-months as part of the deal. Other spending cuts have also been delayed for a year or more. Overall, little has been done towards deficit reduction by way of reducing spending.
• As a result of much of the big issues being delayed, we expect further market uncertainty surrounding the fiscal cliff and debt ceiling. Republicans intend to use the debt ceiling in mid February as an opportunity to force spending cuts; Obama has stated he will not negotiate the matter like he did in 2011. The saga continues…
•Please see below for specific currency commentary.
AUDUSD
• After rallying on the back of the Fiscal Cliff deal, the AUD quickly dipped leading into U.S. employment data. The figure was as expected and the AUD returned to trading a narrow range between 1.0480 and 1.0520.
• On Friday, U.S. Non-Farm Payrolls, a monthly measure of new jobs created excluding agriculture, was released for December with 155,000 new jobs, whilst the Unemployment Rate remained at 7.8%. The data were in line with market expectations though the market initially had mixed reactions. Stock markets made gains for the day, as did the AUD and risk currencies.
• Next Wednesday, U.S. Retail Sales data is released, providing insights into the strength of the holiday consumption.
AUDEUR
• The European debt crisis has been fairly quiet recently. AUDEUR has traded in a narrow range struggling to move much stronger than 0.8000.
• The European Central Bank (ECB) will set the Euro area benchmark interest rate on Thursday night. The current rate is 0.75% and no change is expected.
By Chris Chandler