AUD /USD Gives Up Gains From Strong Cap-Ex

Risk aversion is responsible for the declines in the Australian dollar after the pair popped following fourth quarter capital expenditures increasing faster than expected.

According to the Australian Bureau of Statistics, Q4 capital expenditures advanced 5.5% quarter-over-quarter, faster than calls for a 2.0% increase. Q3’s 3.9% contraction meanwhile was revised down to a 5.2% decline.

AUD/USD popped a modest 16 pips on the back of the announcement, reaching an intraday high of 0.8952 before retracing on the back of rising risk from the budget crisis in Greece.

Also of interest earlier in the day, the Australian leading economic index advanced by 0.6% month-over-month in December reversing a 0.3% contraction the month prior. There was no consensus forecast for this indicator.

Nevertheless, AUD/USD was on the back foot with the pair last trading lower by 30 pips at 0.8907 after trading in a 0.8901 to 0.8952 range so far today.

Short term resistance lies at 0.9026, 0.9030 and 0.9037 with support at 0.8879, 0.8877, and 0.8786.

Greenback Strengthens as Fed’s Bullard Says “Recovery is on Track”

The U.S. employment sector remains “weak” but inflation expectations are rising, St. Louis Fed President James Bullard said on Thursday evening EST. Addressing an event in Memphis, Tennessee, Bullard, who votes on the FOMC this year, said, however, that “the housing sector is stabilizing” and financial markets have strengthened from their levels at the end of 2008. “The economic recovery is on track,” concluded the central banker. Focusing on recent proposals by Congress to change the Fed’s structure, Bullard said, “Allowing short-term politics to mix too closely with monetary policy leads to poor economic outcomes.” He said the industrialized world had seen this happen “frequently” in the last 50 years. Following Bullard’s comments, which suggest that the U.S. economic recovery is coalescing and inflation is a future threat, the greenback strengthened. EUR/USD fell by 20 pips to reach $1.3473USD. Nonetheless, the pair remained safely above its intraday low of $1.3444USD, reached in the aftermath of the Fed’s discount rate hike about four hours ago. Support for the pair lies down at $1.3424USD, hit all the way back on May 18, while, beyond that, it lies down at $1.3247USD, touched on May 6.

USD Broadly Weaker After Speculation of European Intervention in Greece

A number of factors are supporting the euro and weighing on the U.S. dollar on Tuesday, starting with a wave of speculation that the European Union will come to the aid of Greece.

Earlier in the day, European Central Bank President Jean-Claude Trichet decided to leave a meeting of central bankers in Sydney, Australia one day early, so that he could attend a regularly scheduled meeting of European leaders later in the week.

According to traders and analysts, the moves could come as a response to some extraordinary aid coming to Greece and other euro zone nations experiencing extreme fiscal pressures.

According to statement from the ECB, the meeting is a regularly scheduled event which Trichet had already agreed to attend, and it remains unclear whether Trichet’s departure is meaningful or not.

Nevertheless, the move has sparked a broad euro rally, and USD sell off as risk returns to the markets.

Today’s European economic data also imply a stronger European currency.

Earlier this morning the German trade surplus fell to €13.5 billion in December, further than forecasts for a decline to €15.0 billion from the revised €17.2 billion in November. Meanwhile, the current account surplus rose to €20.6 billion, beyond calls for an increase to €19.1 billion from €17.8 billion.

Exports were up 3.0% month-over-month despite calls for a 0.1% contraction and prior 1.1% pickup.

Adding to the pressure on the USD were comments from a Fed speaker suggesting that monetary policy will remain loose for some time yet.

In an interview with the Wall Street Journal published on Tuesday, St. Louis Fed President James Bullard (voting member on the FOMC in 2010) said that market expectations of rate hikes in November are “overblown”. He added that the Fed will likely begin selling its mortgage security holdings in 2010 before raising interest rates.

EUR/USD last traded 105 pips higher at 1.3755 after trading in a range of 1.3643 to 1.3746 so far today. Support lies at 1.3619 followed by 1.3586. Resistance comes in at 1.3755 and 1.40.

ISM-Employment Index

The January ISM non-manufacturing index was reported at 50.5, compared to the 51.0 expected and 50.1 in December. The employment index ticked up to 44.6 vs. 43.6 in December. A reading of 49.5 would have been consistent with the +10K consensus for Friday's non-farm payrolls. More than the headline, the employment number is weighing on markets as risk aversion picks up.