US equities closed at two year highs on Friday supported by news the much anticipated extension of tax cuts were finally signed into law. In a contentious bargaining process with the Republican Party, President Obama on Friday signed into law a two year extension of the bush-era tax concessions worth US$ 858 billion. Nevertheless, key US indices finished little changed from the previous session but the broadest measure of stock values the S&P 500 still managed to squeeze out some mild gains for the week. On balance the US economy has recently eked out some moderately positive economic feedback which is proving to keep sentiment at the very least buoyant. Last week's retail sales result was the latest of economic indicators to provide a glimmer of hope with November sales surprising to the upside recording 0.8 per cent growth in November exceeding the 0.6 per cent estimated.
Locally, the Aussie dollar stayed true to its correlation to indices last week finishing the week up a mild 0.3 per cent in-line with the S&P 500. In contrast, the other two thirds of the commodity trio that is the CAD and Kiwi failed to progress over the week losing 0.3 and 1.7 percent respectively against their US namesake. From a technical perspective, the previous week saw the local unit display all the qualities of a very much in-vogue currency with price action pushing up above US dollar parity, albeit for a short period. Over the course of last week the Aussie was able to hold above the support levels of around 98.3 US cents - barring any major surprises abroad, we expect the local to remain reasonably steady in the week ahead which price action looking comfortable in the 98 US cent region. The highlight of the local week will be the minutes from the RBA's December meeting in which the Reserve bank kept interest steady at 4.75 percent. Like always the minutes will be examined eagerly for any clues; however the market is well and truly prepared for a tone of neutrality from the RBA. Given the fact we've seen more evidence of robust employment activity since the meeting, this may find the minutes a little stale in the eyes of investors. Recent employment data showed the Australian economy added 54,600 new jobs in the month of November from a previous 36,900 well in excess of estimates.
Considering we're at the tail end of 2010, we expect the week ahead to bring light volumes which can of course exacerbate price action across currencies should we see any economic surprises. As stated earlier, the highlight of the local week will be the minutes from the RBA's December meeting, but overall we expect the local unit to remain true to its correlation to US equities with which will have a number of risk events to contend with. From the US, Wednesday will see the release of 3Q Gross domestic product which is expected to show the US economy grew at an annual pace of 2.8 percent from a previous 2.5 percent.
The AUDUSD pair may have reached a plateau in recent times; however the same can't be said for the AUDEUR which continues to show a slow northbound trajectory. It's a battle of the relative fundamentals and you don't have to look too deep to find a conclusion. Throughout the latest bout of ill health from Europe the common theme of Aussie dollar strength against the Euro remains firmly intact. The Aussie dollar rose to new all-time highs of 75 Euro cents on Friday and remains on a firm footing to continue its record breaking run as Europe struggles to regain economic composure. Although It's clear the best grounds for further upward moment from the Aussie comes against major counterparts is when the sun is shining, the local unit has displayed a tendency to continue a slow upward trajectory against the Euro is most economic settings. Even when the Euro was returning from the doldrums against the greenback of USD 1.19 in June this year to recent highs of USD 1.40, the Aussie dollar continued a slow appreciation against the Euro. Barring any major economic surprise to the downside from a local perspective - or China for that matter, the bias remains to the upside.