The Australian and New Zealand Dollars are inching higher on Thursday, but trading inside yesterday’s range suggesting investor indecision and impending volatility as investors awaited more guidance on U.S. monetary policy and whether the recent spike Treasury yields was just a flash in the pan or the start of longer-term shift.
The Aussie is currently straddling the midpoint of its range for the year at .7743 while the Kiwi is trading just below its same mid-point at .7232.
The price action has been primarily guided this week by the movement in U.S. Treasury yields. Rising yields have made the U.S. Dollar a more attractive investment since the first of the year, encouraging the holders of long Australian and New Zealand Dollars to trim their bullish positions.
Treasuries yields eased back a little on Wednesday after more Fed officials played down the chance of a tapering in asset buying this year, but they have bounced back in Thursday’s early trade.
Traders are Watching the Interest Rate Spread for Guidance
Yields on 10-year Australian debt had dipped to 1.043%, from a seven-month peak of 1.118% at the start of the week. That left the spread with U.S. bonds at zero, down as much as +11 basis points in December. The tightening spread drove investors out of the Aussie and into the Greenback.
The first Australian T-note sale of the new year on Thursday drew strong demand with an April 2021 line drawing bids for almost seven times the A$750 million ($581.03 million) on offer, producing an average yield of just 0.0089%.
Given this week’s price action, investors are beginning to wonder whether the Reserve Bank of Australia (RBA) will extend its current A$100 billion bond buying campaign past the deadline of April given the surprising strength of recent economic data.
Job vacancies, retail sales, home building and house prices have all indicated a brisk recovery is underway, seemingly lessening the need for more monetary stimulus.
“The risk is that unemployment falls more sharply than currently forecast by the RBA and Treasury,” said Tapas Strickland, a director of economics at NAB.
“While very welcome, that would likely have significant implications for the future settings of unconventional policy measures and in turn for market pricing.”
Look for potential volatility later in the session at 17:30 GMT when Federal Reserve Chairman Jerome Powell speaks. His comments may determine how soon the U.S. central bank will start reducing debt purchases.