The Australian and New Zealand Dollars were initially pressured last week by the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Reserve Bank of Australia and the Reserve Bank of New Zealand.
Later in the week, the Australian Dollar was underpinned by increased demand for higher risk. However, the New Zealand Dollar continued to break sharply in reaction to a dovish rate statement from the RBNZ.
For the week, the AUD/USD settled at .7407, down 0.0034 or -0.45% and the NZD/USD finished at .6777, down 0.0133 or -1.93%.
The price action in the Australian Dollar essentially reflected a shift in investor sentiment with appetite for risky assets like equities increasing. The Australian Dollar also found buying support in Asia following a stronger-than-expected Chinese Yuan fix from the People’s Bank of China (PBOC).
Throughout the week, the Aussie was unusually sensitive to movement in the Yuan, which could have been because of heightened anxiety over the escalating trade war between the United States and China.
Despite the short-covering rally at the end of the week, the long-term outlook for the AUD/USD remains bearish due expectations of rising U.S. interest rates.
The previous week, the RBA Monetary Policy Meeting Minutes presented a dovish outlook for the Australian economy with investors pricing in the next rate hike for November 2019 or later.
The New Zealand Dollar fell sharply in reaction to dovish comments from the Reserve Bank of New Zealand.
In a widely expected move, the Reserve Bank of New Zealand decided to leave its benchmark interest rate unchanged at 1.75 percent. The tone, however, of the RBNZ rate statement suggested the central bank looks to be leaning towards a more “dovish” stance in response to weaker-than-expected growth numbers.
Traders are saying they knew that rates would stay the same, but they were surprised by the grim tone of Reserve Bank Governor Adrian Orr’s comments. Based on his comments, traders are now saying that a rate hike is a long way off, but the chances of a rate hike cannot be eliminated.
In Australia, the RBA will hold another monetary policy meeting early Wednesday. It is widely expected to leave its benchmark interest rate unchanged. It could also present a dovish outlook for the economy while saying it doesn’t foresee any interest rate hike in the near future. Futures market investors are pricing in the next possible rate hike for November 2019 or later.
Australian Retail Sales are expected to come in at 0.3%, down slightly from 0.4% and the Trade Balance is forecast at 1.21 Billion, up from 0.98 Billion.
There are no major reports from New Zealand.
Wednesday is a U.S. bank holiday so volume should come in well-below average. We could even see low volume the entire week. With the holiday coming in on Wednesday, investors may decide to take an extended week-end.
In the U.S., bullish data should put even more pressure on the Australian and New Zealand Dollars. U.S. reports include ISM Manufacturing PMI, ISM Non-Manufacturing PMI, the Fed Minutes and the U.S. Non-Farm Payrolls report.
Traders will be particularly interested in the Fed Minutes which could reveal the central bank’s thoughts on the impact of a trade war on U.S. economic growth. Traders will also be looking for information on the possibility the Fed will allow inflation to overshoot its 2-percent target.
Because of the holiday on Wednesday, traders may not even react to the Non-Farm Payrolls report until next Monday.