The Australian and New Zealand Dollars finished mixed on Friday. After giving back earlier gains, the Aussie closed lower while the Kiwi managed to post a slight advance.
Improved risk sentiment helped boost the currencies for most of the session but conditions changed following the release of a stronger-than-expected U.S. Producer Price Index report. The PPI’s solid gain in August indicated that high inflation is likely to persist for a while. This drove Treasury yields higher as well as the U.S. Dollar as investors increased bets on a Federal Reserve tapering announcement at its September 21-22 policy meeting.
Early Strength Fades
The AUD/USD and NZD/USD were trading higher earlier Friday as traders tried to recapture some of its weekly loss. The strength was supported by a jump in riskier assets as investors reacted to the news that U.S. President Joe Biden had a wide-ranging call with his Chinese counterpart Xi Jinping on Thursday. The news raised hopes that the simmering tensions between the two super powers would ease.
Bullish traders were also betting that rapid progress on coronavirus vaccinations domestically would help stimulate the economic rebound in coming months. While Australia is still reporting rising coronavirus cases, the share of the population vaccinated has also picked up markedly and should surpass that in the United States in the coming weeks, Reuters reported.
Meanwhile much of New Zealand, barring the city of Auckland, has already seen an easing of stay-at home rules and the government has been seeking extra shots from abroad.
The bullish news was offset during the U.S. session when robust producer inflation raised concerns that the Federal Reserve would have to begin reining in its massive stimulus sooner-than-expected.
US Dollar, Treasury Yields Jump on Fed Tapering Bets
U.S. producer prices increased solidly in August, leading to the biggest annual gain in nearly 11 years, suggesting that high inflation is likely to persist for a while as the unrelenting COVID-19 pandemic continues to pressure supply chains.
The producer price index for final demand rose 0.7% last month after two straight monthly increases of 1.0%, the Labor Department said. The gain was led by a 0.7% advance in services following a 1.1% jump in July.
The Aussie and Kiwi were also pressured by a rebound in the U.S. Dollar. The greenback rose after Cleveland Fed President Loretta Mester said on Friday that she would still like the central bank to begin tapering asset purchases this year, joining the chorus of policymakers making it clear that their plans to begin scaling back support were not derailed by weaker jobs growth in August, Reuters reported.