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AUD remains steady despite fiscal tightening

AUD/USD is still relatively unchanged from yesterday and continues to hold its ground above 0.93. 

As most of the detail from the budget had already been leaked beforehand, there were not too many surprises to the austere budget.  While it will be a fiscal drag, it wasn’t as harsh as many expected, and perhaps that’s why we saw the AUD actually rally post budget.

While the budget was austere, it did bring increased spending on infrastructure investment. In fact, the $29.8 billion deficit by 2015 is narrower than what the market expected. Some of the key revenue drivers will be the re-indexation of the fuel excise tax and a temporary budget repair levy on high income earners (over 180,000 a year). Meanwhile cuts to schools and hospitals along with family tax benefits systems will be the main savings. All this means is that the RBA will not be hiking rates for a while, with some brokers like DB feeling there will be no change in rates through 2014 and 2015.

RBA will likely have to stay on hold for longer

Due to the fact the budget was mostly priced in, AUD/USD hasn’t done much at all and remains sidelined at 0.936. It’s also important to note that this budget is likely to result in a fiscal repair of Australia’s books, in which case local bonds will only look more attractive to the international community. This could ultimately give the AUD some upside. There is also a camp that feels the government has been quite conservative with its projections. If data shows we are tracking ahead of projections, then this could give the AUD a kicker.   

Cable on data watch

The pound has been the other big mover in the FX space and has descended quite significantly from highs just shy of 1.70 against the greenback. Cable printed a low of 1.682 overnight and continues to hang around those levels. There is a busy day ahead on the economic calendar with UK jobs, the BoE inflation report along with a Governor Mark Carney speech. The data and commentary could come in fairly hawkish and this would result in a cable recovery. The recent pullback is seeing cable test support and if this holds then a near-term recovery could be on the cards.

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