Forex Market: AUD/USD pulls back from 15-month highs as US-China tensions escalate, Australia forecasts massive budget deficit

AUD/USD rallied for a fifth straight trading day on Thursday and remained not far from yesterday’s 15-month high, but market players are now likely to stick to caution amid escalating tensions between China and the United States.

China has until Friday to close its consulate in Houston on accusations of espionage, while US President Trump noted it was “always possible” other Chinese missions could face order to close too.

The Asian economic giant has pledged response. China’s state media said on Thursday the US decision was a political move ahead of the presidential election in November. According to a report by Reuters, China, in turn, is considering to close the US consulate in Wuhan.

Meanwhile, in an announcement earlier Thursday, Australian Treasurer Josh Frydenberg said the country had registered a budget deficit of AUD 85.8 billion ($61.3 billion) during the fiscal year ending in June 2020 and another massive shortfall of AUD 184.5 billion was expected in the fiscal year to June 2021.

Australia’s gross debt is now expected to increase by AUD 168 billion to AUD 851.9 billion by June 2021, which would represent 45% of yearly Gross Domestic Product. Still, however, this grim outlook alone will probably not jeopardize Australia’s “AAA” credit rating, according to S&P Global Ratings. The ratings agency warned that a cut in Australia’s rating was possible in case the coronavirus pandemic appeared to have dealt more severe damage to economy than anticipated.

“Risks to our rating remain tilted toward the downside as the effects of the COVID-19 pandemic and government responses on the economy, budget, and financial markets evolve,” S&P said.

“We believe that second waves of COVID-19 infections could strike other parts of the country, though other states have been effective in containing the spread so far.”

As of 7:05 GMT on Thursday AUD/USD was edging up 0.22% to trade at 0.7156, after surging to 0.7182 yesterday, or a level not seen since April 18th 2019 (0.7199). The major pair has risen 2.33% so far this week, following four successive weeks of gains.

On today’s economic calendar, at 12:30 GMT the US Labor Department will report on jobless claims. The number of people in the country, who filed for unemployment assistance for the first time during the business week ended July 17th, probably stood at 1,300,000, according to market expectations, or the same number of claims as reported in the preceding week.

Data for the week ended July 10th brought the total number of claims reported since March 21st to 51.3 million, as several US states were forced to scale back or postpone reopening plans.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 13.6 basis points (0.136%) as of 6:15 GMT on Thursday, down from 13.8 basis points on July 22nd.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7145
R1 – 0.7178
R2 – 0.7215
R3 – 0.7248
R4 – 0.7281

S1 – 0.7108
S2 – 0.7075
S3 – 0.7037
S4 – 0.7000