Australia: The Australian dollar was sold lower throughout yesterday’s Asian session as rumours emerged of further North Korean shelling. It was later reported that the shells landed in North Korea’s own territory, but nonetheless, financial markets remain nervous in relation to any news out of the region. The USD has retained a bid tone overnight after yesterday’s announcement from President Obama on the proposed extension of US tax cuts. US interest rates have moved higher on the news, effectively lessening the interest rate gap between US and Australian interest rates. This may mean that the AUD will struggle to break back above parity again before the end of the year. In the longer term, the majority of forecasters are still predicting the AUD will head higher, possibly towards USD1.0500, on strengthening commodity prices. The main focus for today’s local session will be employment data due for release this morning at 11.30am AEST. Expectations are for a 20k increase in the number of employed, with the unemployment rate expected to come in at 5.2%.

Majors: The USD was generally stronger against most of the other majors overnight after news of the tax cuts. It appears that some key Democrats are now supporting the proposal, raising expectations for US growth and inflation. As mentioned above, this has seen an increase in US yields, making USD assets relatively more attractive for investors. In an environment where interest rates have been at historically low levels, investors remain keen to pick up return whenever possible. Should US yields continue to rise we may see a real turn around in the fortunes of the USD. Given the turnaround in the USD, gold futures continue to pullback from recent record highs. Crude oil was also lower on fears that China may soon move to increase their interest rates to keep inflation under control.

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