The Australian and New Zealand Dollars are inching lower on Thursday after falling to follow through to the upside, following yesterday’s short-covering rally. The short-covering is being fueled by bearish traders making adjustments to the suddenly weakening U.S. Dollar. The Aussie and Kiwi haven’t become more desirable investments out of the blue, but the U.S. Dollar has unexpectedly become a less-desirable asset this week.
The Australian Dollar is in a downtrend and bearish with further rate cuts to come perhaps later this year and in 2020. The two day rally we are looking at is just short-covering related to a weakening U.S. Dollar. The move doesn’t represent a suddenly bullish outlook for the Australian economy so trade accordingly and don’t get married to the long side.
At its October policy meeting on October 1, the Reserve Bank of Australia (RBA) cut its benchmark interest rate 25 basis points as widely expected. This was the third cut since June. The sum of the three cuts have driven rates to 0.75%.
The rate cuts are expected to keep coming according to RBA Governor Philp Lowe, with some whispering that quantitative easing is also on the table.
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” he said in his statement.
“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.”
“The economy still has spare capacity and lower interest rates will help make inroads into that.”
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”
New Zealand Dollar
Over a week ago, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate unchanged at 1%, but said there is still scope for further stimulus if necessary. The RBNZ said that new information it had received since the last Monetary Policy Statement by the bank in August “did not warrant a significant change to the monetary policy outlook”.
The statement from the RBNZ was rather more upbeat than the markets were expecting and the odds on a November rate cut were reduced.
Since then, however, economists have said that a lower OCR remains in the cards. Furthermore, the recent sell-off in the New Zealand Dollar suggests traders are pricing in a 25 basis point cut next month.
At the start of the week, the short-term outlook for the AUD/USD and NZD/USD was extremely bearish, however, economic events in the U.S. this week have weakened the U.S. Dollar, encouraging Aussie and Kiwi traders to lighten up on the short side.
With the focus suddenly shifting to the U.S. economy and the rising probability of a Fed rate cut at the end of October from 20% to 75%, U.S. economic data on Thursday is going to take on added importance.
The major report is ISM Non-Manufacturing PMI, due to be released at 14:00 GMT. It is expected to come in at 55.1, lower than the previously reported 56.4. A reading over 50.0 will indicate expansion, but traders will be focused on whether the services sector is weakening. If it comes in well below the estimate then look for the odds of a rate cut to increase, making the U.S. Dollar less-desirable.
Traders will also be looking at Weekly Unemployment Claims in the wake of a slowdown in private sector hirings according to ADP on Wednesday. Factory Orders will be another key report.
Essentially, the short-covering rally in the AUD/USD and NZD/USD will continue if the ISM Non-Manufacturing PMI report comes in weaker-than-expected.
This article was originally posted on FX Empire
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