AUD/USD: US Economic and Fiscal Cliff Worries Weigh on Sentiment

Risk off trades are presumed to strengthen the US dollar opposite the Australian dollar today as the economic effects of Superstorm Sandy became rather apparent in yesterday’s raft of economic data. Today, an expected bleak Industrial Production report for October is once again foreseen to underscore views that the world’s largest economy is losing steam after steady gains in recent months.

With Superstorm Sandy displacing thousands of residents and shuttering businesses in the Northeast, the number of US workers filing for jobless benefits surged last week. The Labor Department reported that claims increased by 78,000 to a seasonally adjusted 439,000 in the week ended November 10. The figure largely missed forecasts of a rise to 372,000. The four-week moving average of claims increased by 11,750 to 383,750 as a result. A Labor Department analyst expressed that the storm was the cause of the increase because people were without work after schools were closed, factories were flooded and construction sites stalled. Before Sandy struck, the jobs market had been gradually improving, and today’s report suggests that the sector could usher in a renewed slowdown.

Meanwhile, several other reports revealed that manufacturing shrank in the Philadelphia and New York regions this month as Sandy disrupted factories in the area. The Federal Reserve Bank of Philadelphia revealed that manufacturing activity in the mid-Atlantic region dipped to a five-month low of -10.7 points in November, significantly worse than the 5.7 grade in the previous month. The Empire State Manufacturing Index, which gauges conditions in the New York region, was also negative. The index registered a score of -5.2 points, slightly better than -6.2 points in October. Manufacturing in the country has slowed sharply in spring as companies scaled back investment plans while slower global growth has debilitated US exports. Such strains are likely to be reflected by the Industrial Production report by the Federal Reserve due today. Industrial output is believed to have increased by 0.2 percent in October, only half the pace seen in the previous month.

Likewise, heightened fears over a continued gridlock in Washington over impending tax increases and spending cuts slated to begin next year is set to keep markets on edge today. As President Obama and congressional leaders prepare for talks today aimed at preventing the US economy from falling back into recession, Democrats and Republicans retained their long-held opposing positions. Senate Republican leader Mitch McConnell stated that they remain opposed to raising taxes, but increasing taxes for the wealthy was exactly what President Obama emphasized in his first post-election news conference. Amid this backdrop, a short position on the AUD/USD is recommended today.

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