The Australian and New Zealand Dollars finished sharply higher last week buoyed by a combination of economic data and hopes that China would ramp up fiscal stimulus. The Aussie and Kiwi even spiked higher late in the week on a report from Bloomberg that President Trump had asked his cabinet to prepare documents for a trade deal. This notion, however, was shot down on Friday by Trump’s Senior Advisor Larry Kudlow, who said there was no truth to the report.
As far as domestic economic data was concerned, Australian Quarterly Consumer Inflation disappointed somewhat by coming in at 0.4%, matching the previous quarter, but missing the 0.5% forecast. Retail Sales were also disappointing, posting a gain of 0.2%, below the 0.3% forecast.
Bullish Aussie traders did have something to celebrate, however, following the release of stronger-than-expected Trade Balance data. The trade balance came in at 3.02 billion, much higher than the 1.71 billion forecast. The previous month was also revised higher to 2.34 billion.
There wasn’t much to celebrate in New Zealand as far as economic data was concerned. Most of the bullish price action in the Kiwi was optimism tied to expectations of fresh stimulus from China and the end of the trade dispute between the United States and China.
The major report was ANZ Business Confidence. It came in at -37.1, a slight improvement from the previously reported -38.3. It may have reduced speculation that the Reserve Bank of New Zealand was planning a rate cut.
Two forces are influencing the price action on the AUD/USD and NZD/USD at this time.
The long-term is bearish because of the divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand. Simply stated, the Fed is raising rates and the RBA and RBNZ are expected to hold rates steady until at least 2020. This makes the U.S. Dollar a more desirable investment.
The short-term direction of the AUD/USD and NZD/USD is being dictated by the escalating trade dispute between the United States and China. The tariffs on China are hurting its economy and consequently the economies of Australia and New Zealand. This comes at a time when the U.S. economy is booming.
Another short-term factor is heightened stock market volatility. This tends to drive up safe-haven demand for the U.S. Dollar.
We saw last week that any news suggesting the possible end to the US-China trade dispute is likely to trigger a tremendous short-covering rally by the Aussie and Kiwi.
This week, investors will get the opportunity to react to the U.S. mid-term elections on Tuesday, interest rate decisions and monetary policy statements from Australia on Tuesday and New Zealand and the U.S. on Thursday.
The U.S. will also release data on ISM Non-Manufacturing PMI and Producer Inflation. New Zealand will also release its labor market report.
As far as the mid-term elections are concerned, it has been generally accepted that a Republican victory would be good for business. This should be lead to increased demand for higher risk assets. Stocks should rise as well as Treasury yields, which should make the U.S. Dollar a more attractive investment.
A Democratic Party victory would likely be bullish for the Aussie and Kiwi because it could mean President Trump may lose the power to impose additional tariffs on China, and his tax cuts could be rolled back which could weaken stocks.
This article was originally posted on FX Empire
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