The Australian and New Zealand Dollars are trading higher on Monday, benefiting from increased demand for higher-yielding assets and a weaker U.S. Dollar. The move is also being driven by follow-through buying related to Friday’s short-covering spike that was fueled by mixed U.S. jobs data and lowered expectations of a fourth rate hike by the U.S. Federal Reserve later this year.
The latest jobs data showed the economy added more jobs than expected in June, but a smaller-than-expected rise in average hourly earnings raised some concerns that the Fed may have to alter its plans for two more rate hikes later this year.
U.S. Treasury yields fell partly in response to the mixed U.S. Non-Farm Payrolls report. As a result, expectations of a fourth U.S. Federal Reserve rate hike later this year declined. According to the Fed Funds Indicator, investors priced in a 77 percent chance of a September rate hike, down from 80 percent before the jobs data.
So while a September rate hike is still a likely event, traders feel that without an acceleration of wage growth, a fourth hike at the end of the year is a more difficult call and the futures market shows that traders are putting the odds of a December rate hike at about 50 percent.
The drop in yields helped make the U.S. Dollar a less-desirable investment, encouraging short Aussie and Kiwi investors to lighten up on their bearish bets.
Treasury yields are rising on Monday so the strength in global equity markets is responsible for the gains by the AUD/USD and NZD/USD today. Aussie and Kiwi traders are also responding to the stronger Chinese Yuan that has underpinned the currencies since the People’s Bank of China intervened to prop up its currency about six days ago.
An easing of selling pressure on gold is also helping to support the Australian Dollar. However, we haven’t seen any major trading activity in iron ore yet.
Additionally, investors seem to be enjoying the relative calm over the U.S.-China trade dispute. Although the U.S. followed through on its threat to impose a tariff on $34 billion in Chinese imports on July 6, the price action indicates the news had been fully-priced into the market. Therefore, we’re not likely to see much of a reaction to the tariffs unless there is further retaliation from China, or additional tariffs from the United States.
Keep in mind that we’re looking at a short-term relief rally. The longer-term picture is still bearish for both currencies due to the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand.