The Australian and New Zealand Dollars are trading mixed early Thursday after succumbing to heavy selling pressure the previous session. At 0322 GMT, the AUD/USD is trading .7373, up 0.0006 or +0.07% and the NZD/USD is at .6751, down 0.0005 or -0.7%.
On Wednesday, the Aussie and the Kiwi were pressured on two fronts, lingering concerns over an escalation of the trade dispute between the United States and China after the U.S. released a list of additional tariffs on Beijing, and better-than-expected U.S. producer inflation data.
Furthermore, the Australian and New Zealand Dollars are often seen as a liquid proxy option for emerging market exposure given their strong links with China. Therefore, it is not surprising to see their currencies declining amid the current trade-driven global growth concerns.
Additionally, lower demand for risky assets along with steep declines in commodities, ranging from crude oil to copper, weighed on the Aussie and the Kiwi.
Ultimately, it all comes down to the direction of interest rates and at this time, the advantage is with the U.S. Dollar because of rising Treasury yields and the hawkish U.S. Federal Reserve, which is expected to raise rates as many as two more times this year. Wednesday’s strong U.S. producer inflation report supported the notion of additional rate hikes.
U.S. producer prices increased slightly more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.
According to the U.S. Labor Department, the producer price index for final demand climbed 0.3 percent last month also lifted by increases in gasoline prices. In the 12 months through June, the PPI advanced 3.4 percent, the largest gain since November 2011. Traders were looking for an increase of 0.2 percent and an annual gain of 3.2 percent.
The Core PPI also rose 0.3 percent in May. Economists had forecast a gain of 0.2 percent. In the 12 months through June, the core PPI rose 2.7 percent.
If the trade tensions between the United States and China continue to worsen then look for more downside risk for the Australian and New Zealand Dollars. Adding further to the price deterioration in these currencies will be strengthening U.S. economic data, which will support additional interest rate hikes by the Fed.
We could see a repeat of Wednesday’s trade if today’s U.S. consumer inflation report comes in strong enough to support the Fed’s plans to raise interest rates in September and December. A steady to stronger-than-expected report should drive Treasury yields higher, which should make the U.S. Dollar a more attractive investment.
On Thursday, the U.S. consumer inflation report could temporarily take market focus away from trade worries, particularly if it surprises to the upside like yesterday’s producer prices report.
Traders are looking for both the headline Consumer Inflation Index and the Core Consumer Inflation Index to post a 0.2 percent increase.
This article was originally posted on FX Empire
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