The Australian and New Zealand Dollars finished lower last week. The selling pressure was driven by a number of factors including tension over a possible trade war between the United States and China, mixed demand for higher risk assets, and a divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Reserve Bank of Australia and New Zealand.
The AUD/USD settled at .7440, down 0.0002 or -0.03% and the NZD/USD closed at .6910, down 0.0030 or -0.44%.
The selling pressure started early in the week after U.S. President Donald Trump threatened more tariffs on China in an escalating trade dispute investors fear could hurt global growth. Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation.
The Australian and New Zealand Dollars were also pressured after U.S. Dollar investors bet on an escalating trade war forcing inflation up in the U.S. because of costlier imports, raising the prospect of more interest rate hikes.
The AUD/USD and NZD/USD attracted buyers late in the week after the U.S. reported weaker-than-expected manufacturing data. The Philadelphia Federal Reserve’s gauge of U.S. Mid-Atlantic business activity fell to a 1-1/2 year low, raising concern about the U.S. economy.
The Aussie and Kiwi were also underpinned on Friday after OPEC producers announced a perceived modest increase in oil output. This drove up crude oil prices, helping to support commodity-linked currencies.
The AUD/USD and NZD/USD could see a bounce over the short-run if buyers continue to react to a rise in crude oil prices. However, the long-term outlook is still bearish because of expectations of rising U.S. interest rates.
The key story remains U.S.-China trade relations. The Aussie and Kiwi are likely to remain under pressure if U.S. threats of additional tariffs escalate into a full-blown trade war with China.
Both currencies are in down trends because of the divergence in central bank policies and this is not likely to change for months. The periodic rallies we witness are not policy driven moves, but rather short-covering adjustments to news events. Markets do post counter-trend rallies even in the most bearish of trends.
Last week, the RBA minutes revealed nothing new so we know the central bank is not likely to raise rates until at least November 2019. This week, the RBNZ is widely expected to leave its benchmark interest rate at 1.75% and in its rate statement, it is expected to suggest that rates will remain low until late next year.
This week’s other key reports include U.S. Consumer Confidence, U.S. Durable Goods and U.S. Final GDP.