AUD/USD: Greenback To Pare Gains Against Aussie On Fiscal Cliff Hopes

With reports of a fiscal cliff deal closer to fruition, market confidence is perceived to wane the safety bet US dollar opposite the Australian currency in the New York exchanges today. Earlier losses by the aussie after the Reserve Bank of Australia cited a softer labor market for cutting interest rates at this month’s meeting are projected to be pared on further signs of budget deal progress.

Hopeful signs of progress had US stocks accelerate their gains in the final hour of trading to finish near session highs yesterday, with all key S&P sectors finishing in positive territory. Asian shares likewise rose earlier today on the fresh signs of a fiscal compromise. European equities also traded higher earlier on market confidence from the progress in the fiscal cliff negotiations.

Aides from both parties were optimistic an agreement was shaping up after President Obama and House Speaker Boehner held talks at the White House earlier yesterday. A counter-offer by President Obama to Republicans was made, which included a major change in position on tax hikes for the wealthy, according to a source familiar with the talks. In the new proposal, tax revenue demand was lowered by $200 billion, while offering to start tax rate increases at $400,000 in income instead of $250,000.

The revised plan would raise $1.2 trillion in taxes in the next decade and cut $1.22 trillion in spending. Further, President Obama wants a large enough debt ceiling increase for the next two years and would accept a new inflation yardstick that would reduce Social Security cost-of-living increases, said the person, who sought anonymity.

In a statement, Brendan Buck, a spokesman for Mr. Boehner, said that, “any movement away from the unrealistic offers the president has made previously is a step in the right direction, but a proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced.”

Though Obama and Boehner appeared to be edging closer to an agreement, substantial hurdles remain. Rank-and-file Republicans could have trouble with the tax increases on the wealthiest Americans that are likely to be part of any deal, while Obama could have a tough time selling spending cuts to his fellow Democrats. Nevertheless, signs that the fiscal cliff discussions are making progress are considered positive, especially as the deadline looms closer. The greenback is then projected to give way to gains by the Aussie in the upcoming exchanges.

With these in mind, a buy bias can be considered for the AUD/USD today. Technical price corrections are likely, especially after the RBA’s minutes showed that labor data “suggested that the inflation outlook still afforded the board some scope to provide additional support to demand.” It also cited “further confirmation that the peak in resource sector investment was near.”