AUD/USD Could Target Parity In 2013

Includes: FXA, FXE, UDN, UUP
by: Angelo Airaghi

The Reserve Bank of Australia has just cut interest rates by 25 basis points. The Australian dollar (AUDUSD) is overbought and could correct to 1.0340/1.0180 during the first months of 2013. EURUSD is contracting from the resistance at 1.3130. However, an increase to 1.33 is still possible this year.

Central Bank Wants a Cheaper Australian Dollar

Last week, the Reserve Bank of Australia (NYSE:RBA) cut its policy rate by 25 basis points. Economic data confirmed that a peak in resource investment is nearing. Further cuts were not anticipated by the RBA and the AUDUSD rose to the important resistance line at 1.0510. The RBA also declared that the exchange rate is higher than expected, considering the decline in export prices and the troubling global outlook. In effect, Australian growth stays subdued by mild investments in the mining sectors and by the government's intention to achieve a budget surplus next year throughout the fiscal tightening. Therefore, in 2013, other cuts are possible and the Aussie can be under pressure. Various technical indicators point to a decline of 1.0340, 1.0250 and 1.0180. First, there is strong divergence between price and the RSI indicator on the daily and weekly chart. Second, funds are overly long for the Australian dollar accordingly to the latest Commitment of Traders (COT) report. Finally, in the past, January has not been a good month for the Australian dollar.

U.S.: Playing With Fire?

Politicians in Washington D.C. must act and do it soon. Last week's data confirmed that conflicts over fiscal matters are taking a toll on the economy. On one hand, in November, the economy created 146,000 new jobs on top of October's 138,000. Consequently, the unemployment rate declined to 7.7% from 7.9%. On the other hand, The U.S.ISM (institute for supply management) manufacturing index declined below the important benchmark of 50. Components for new orders fell to 50.3 and, most importantly, employment slid to 48.4. New export orders stalled again and remained below 50 for the sixth time in a row. It is true that inventories are low and can help in keeping the tiny momentum going. The production index rose, in fact, to 53.7. Nonetheless, production will decline if demand does not increase shortly.

The U.S. dollar stays under pressure for now. The European Central Bank (ECB) left rates unchanged and the EURUSD can still move toward 1.33 in spite of the recent correction. Yields are rising again in Italy as Monti's government can soon end its mandate. Berlusconi has, in fact, decided to run again for office and new political elections are a possibility in spring. President Draghi admitted that the recession in Europe worsened in the last part of 2012. Industrial production is down 3.6% year-on-year in Germany. Some ECB members wanted rates to be cut again. However, the ECB will remain on hold for some time. According to the ECB's president, key leading economic indicators have bottomed, although growth is uneven in the eurozone. Credit stays very expensive in the peripheral zones and investments are mild. The ECB will buy unlimited bonds if necessary, but nations must ask for assistance first. Mr. Draghi is optimistic about the implementation of the Single Supervisory Mechanism (SSM), giving the supervision of banks in the eurozone to the ECB,although a compromise among the EU members will require time to be achieved. Poland and Sweden want to be part of the decision making process. Germany does not want a full banking union at all.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.