The Australian and New Zealand Dollars are trading higher early Wednesday after posting a volatile trade the previous session. The price action suggests traders are trying to form a support base ahead of key U.S. Federal Reserve monetary policy decisions later in the session including whether it will announce a timetable for its plans to taper its current massive stimulus.
Steady risk sentiment is also contributing to the possible base-building process as Aussie and Kiwi investors drew some relief in news embattled Chinese property Evergrande would make a coupon payment on its domestic bonds on September 23, calming fears of an imminent default.
Despite today’s slight rebound, Aussie traders are still concerned about the viability of the heavily indebted group especially after fears of contagion drove global equity markets and commodities sharply lower at the start of week, and pressured the Aussie which is often used as a liquid proxy for Chinese risk.
“The Aussie dollar is still vulnerable to a further worsening of risk sentiment, although we think that the Chinese authorities will manage to avoid a full-blown financial crisis,” said Jonathan Peterson, a market economist at Capital Economics.
Aussie Faces Risk from Hawkish Shift in Fed Policy
Ahead of the Fed’s monetary policy announcements, traders are saying policymakers will discuss tapering but put off an actual announcement to October or November.
Meanwhile, the danger for the Aussie could be in the “dot plot” forecasts from Fed members which might show the median timing of the first rate hike has shifted to 2022 from 2023.
The Reserve Bank of Australia (RBA) remains adamant that its rates are likely to stay at 0.1% until 2024, which is why 10-year bond yields trade five basis points below Treasuries at 1.28%.
A further widening of the spread between U.S. Treasury bonds and Australian Government bonds will make the U.S. Dollar a more attractive asset.
Investors don’t feel the same way about the New Zealand Dollar, however, since the Reserve Bank of New Zealand (RBNZ) is almost certain to raise its Official Cash Rate (OCR) at its October 6 policy meeting.
The markets have fully priced in a move of 25 basis points to 0.5%, though they scaled back wagers on a half-point hike following a speech from RBNZ Assistant Governor Christian Hawkesby on Thursday.
Look for the AUD/USD to weaken if the Federal Reserve moves up the timing of its first rate hike from 2023 to 2022. The NZD/USD may be capped by the news, but it shouldn’t feel that much selling pressure.