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.

IG Charts

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.