The Australian and New Zealand Dollar finished higher last week, driven by the weaker U.S. Dollar and carry trade buying by aggressive hedge funds. Dovish remarks from Federal Reserve Chairman Jerome Powell were the catalysts behind most of the strength. With investors pricing in a 100% chance of a 25-basis point rate cut and only a 30% chance of a 50% basis point rate cut.
Powell Signals Rate Cut
On July 10, Fed Chief Jerome Powell, in prepared remarks for Congress, reaffirmed that the central bank is concerned about economic weakness and that it will act as “appropriate” to sustain the recovery – a signal to markets that a rate cut is coming soon.
“It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook,” Powell said in prepared remarks.
Fed Minutes Strengthen Case for Rate Cut
Minutes of the Fed’s June meeting released shortly after Powell’s testimony underscored the Fed chief’s message, strengthening the case even further for a rate cut.
The majority of policy makers noted that the “economy had appeared to have lost some momentum” in recent weeks at their meeting, pointing to weaker business confidence, trade tensions and signs of slowing of global economic growth. They also highlighted worries over risks that might be spurred by federal budget negotiations or a delay in raising the federal debt limit, according to CNN Business.
“Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook,” the minutes of the June meeting said.
Additionally, several policy makers said a rate cut may be needed in the near future because it could “cushion the effects of possible future adverse shocks to the economy.”
Hedge Funds Enter Picture
The U.S. Dollar’s weakness also revived the carry trade, where hedge funds borrow in low-yielding currencies such as the Swiss Franc and the Euro to purchase higher-yielding ones such as the Australian and New Zealand Dollars.
Domestic Data Mixed
In Australia, ANZ Job Advertisements came in better than expected as well as a report on Home Loans. However, investors were disappointed by week NAB Business Confidence and Westpac Consumer Sentiment.
In New Zealand, Business NZ Manufacturing came in at 51.3, higher than the previously reported 50.4.
With the Fed rate cut seemingly out of the way, Aussie and Kiwi traders will shift their focus to domestic data and news from China.
In Australia, traders will get a chance to react to Monetary Policy Meeting Minutes from the Reserve Bank of Australia on Tuesday and reports on Employment Change and the Unemployment Rate on Thursday. Traders will be watching the unemployment data closely since it was cited in the last RBA statement as one reason why the central bank cut rates in early July.
In New Zealand, traders will respond to quarterly consumer inflation data. It is expected to come in at 0.6%, up from 0.1%.
The week starts with China releases a slew of economic data including quarterly GDP which is expected to come in at 6.2%, Fixed Asset Investment, Industrial Production, Retail Sales and the Unemployment Rate.
Stronger numbers from China are likely to be supportive for the Aussie and Kiwi early in the week, but look for volatility to return and a potential change in trend later in the week with the release of the Australia labor market data and the New Zealand consumer inflation report.