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Inflation remains a concern in the US

It was a fairly mixed performance in the FX space with traders juggling economic data and comments by Ben Bernanke. 

Bernanke played it safe with QE and basically maintained his support for the program, saying it doesn’t really pose any asset bubble risk. US economic data also came in-line with expectations, with CPI and unemployment claims meeting estimates. Unemployment claims actually fell to 326,000 and continued the downtrend we’ve been seeing. Meanwhile December CPI was up 0.3% from November and 1.5% year-on-year.

However, some feel the benign inflation growth might be a concern for the Fed as far as tapering goes. The Philly Fed manufacturing index was also ahead of estimates and helped maintain the momentum we had seen from the Empire State reading. All this data resulted in some mixed performances in the FX space. Major FX pairs were relatively sidelined and the AUD managed to hold onto 0.88 against the greenback. Later today we have building permits, housing starts and industrial production due out.

AUD likely to be sold into strength

AUD/USD remains the pair to watch after a sharp drop yesterday on the back of that jobs reading. The pair continued to venture below 0.88 but has since reclaimed this level in Asian trade. The implication of the disappointing jobs reading from an interest rate perspective is what many investors will be looking out for now. While the reading is alarming, it might not be enough to see the RBA cut rates in February. The RBA is more likely to wait and see how the current dynamics on a macro level play out as well as another month of data before making a call on rates.

Assessing the impact of price action on the US dollar side will also be interesting in coming months. Any action on the US or Australia side which keeps AUD/USD low might help the economy pick up. Earlier in the week I suggested selling AUD/USD when it traded above 0.90. Having dropped so low in a short period of time I wouldn’t be surprised to see a near-term bounce before sellers re-emerge at higher levels. Near-term resistance is now at December lows in the 0.8850 region. 

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