Bell FX Currency Outlook: The Australian Dollar dropped to a one-year low following some positive comments on the US economy by the head of the Federal Reserve.

Australia: The AUD fell as low as USD 0.9662 in the early hours of this morning, which is its weakest level since June 2012. By 8am this morning, the AUD had recovered some ground back to the major support level of 0.9700 but has since slid again to 0.9655.

It truly appears that the range has broken, with the new world seeming to be taking shape between 0.9250 and 0.9850. But as we have been saying to our clients, this is not really about the AUD.

The sharp rally in the USD is the issue because the market is pricing in some tapering of QE by the end of 2013. In the past month, the AUD has lost more than six US cents and parity is looking a very long way away now.

If the Fed does not begin the tapering process over the next few months (because the data will not justify it) then currencies are prone to a reversal of last night's severe moves.

In a trend sense however, the AUD has little evidence to support its return. Today in Asia the key events are the CNY fix and the China PMI.

The low China fix has been one of the reasons that Asian currencies have held in relatively well given the portfolio adjustments that are occurring elsewhere.

Markets are clearly more exposed to a high fix and a low PMI. Yesterday's batch of local Australian data all pointed towards a somewhat softer economic outlook.

Consumer confidence tumbled from 104.9 to just 97.6 which are the lowest since August last year. Skilled vacancies fell -1.3% in April.

This is the 13th consecutive monthly decline. This year almost certainly is the peak in major resource project spending and indeed the larger picture of total mining capital expenditure as reported by the ABS may well have already peaked. Watch for more volatility today and offshore tonight.

Majors: US Federal Reserve Chairman Ben Bernanke's testimony and the Minutes from the latest FOMC meeting were the key events overnight.

There was little change in their thinking on policy, which suggested to us that the Fed will remain cautious in regard to any tapering of the current asset purchase program (currently at USD85bn/month).

However, bonds rallied sharply and equities fell after Bernanke said in the Q&A session that the Fed may wind back the program in coming months if the economic data gave it lenience.

The USD strengthened sharply, impacting on its major crosses with most currencies now having broken out of pre-existing trading ranges.

The EUR is the exception to this, with it outperforming on the crosses due to the release of data showing the Euro-area current
account posting a record surplus of EUR25.9bn in March.
Economic Calendar
23 MAY AU Consumer Inflation Indication
EC PMI Manufacturing
UK GDP
CH HSBC FLASH MANUFACTURING PMI