$A breakout fails to hold; Euro takes a tumble

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By Chris Gore | December 7, 2012 10:06 AM EST

GoMarkets

AUD breakout fails to hold

After a number of previous attempts, the Aussie dollar finally pierced the upside of resistance between 104.8 and 105-figure overnight before topping out at 105.16 US cents. The local unit took a leg-up in the ensuing period of yesterday's jobs data, but resistance below 105-figure held price action at bay until positive transatlantic momentum encouraged a second wind, eventually carving out short term gains above 105 US cents. Still, the momentum was short lived with a south bound Euro and falling oil prices encouraging natural greenback support, in turn providing moderate headwinds for the Aussie.  Nonetheless, should risk trends permit, it would now be reasonable to expect increased upside potential above the 105-figure, given the flushing out of selling resistance and previously held short orders. The key phrase here is of course 'should risk trends permit'.

Other significant moves came from the Swiss franc, which followed the Euro lower against the greenback, with the USDCHF pair rising beyond the 93-figure for the first time in a week.

Markets found solace in a steep drop in the weekly jobless claims, with fell to 370,000 for the week ending December 1. US equities managed to squeeze out a second day of gains, but true to form gains were limited with the fiscal cliff remaining a deterrent for any meaningful breakout. While there appears to be element of faith that a consensus can be reached before the deadline, markets are unwilling to reward any perceived progress to any great extent, with the disappointment risk associated with the news flow still extremely high. President Obama said Wednesday "we can probably solve this in about a week," should the positive momentum in negotiations continue.

Local data on the today's docket includes the trade balance which is expected to show a deficit of AUD2.2 billion in October from a previous deficit of AUD1.5 billion. Also coming up  is the RBA FX transactions data due later this afternoon ahead of particularly important evening for global markets with US non-farm payrolls on the bill. At the time of writing the Australian dollar is buying 104.8 US cents.

Euro appeal diminished as ECB flags lower growth/inflation

After rallying above $US1.31 Wednesday, the Euro hit the skids with a solid break to the downside of two big figures while remaining vulnerable near to daily lows of $US1.2949.

Preliminary data for Euro-Zone GDP showed a third-quarter contraction of 0.1 percent, to reflect a 0.6 percent drop in annual terms - in line with consensus estimates. A jump in German factory orders was the exception to the overall negative tone with orders rising 3.9 percent in October, to represent a 2.4 percent contraction in annual terms. A deeper slump of 5.6 percent was expected.

As anticipated the European Central Bank held their main refinance rate steady at 0.75 percent. Nonetheless, a downgrade in the banks growth and inflation forecasts highlighted potential for further policy easing, with markets quick to price-in a rate cut early in 2013. The bank expects the Euro-Zone economy to contract 0.5 percent this year from earlier estimates of 0.4 percent, before moderating in 2013, with a contraction between 0.3 and 0.9 percent expected. Consumer prices are projected to moderate further from 2.5 percent this year to between 1.1 and 2.1 percent in 2013 and between 0.6 and 2.2 percent in 2014.

"Over the shorter term, weak activity is expected to extend into next year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand," ECB President Draghi noted at the post decision press conference.

While a rate cut may appear viable in the context of growth and inflation, it expected to remain a contentious issue for flagship Germany, with further monetary easing likely to be met with resistance given their innate aversion to pro-inflation policy.

Across the Channel, the Bank of England also held their official cash rate steady at 0.50 percent, with no amendment to their asset purchase program which currently stands at GBP375 billion.

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