The Australian and New Zealand Dollars finished lower last week on renewed concerns about China’s economy. For much of the week, investors were in consolidation mode as positive news emanated from the on-going trade talks between the United States and China. However, this came to an abrupt end when softer-than-expected economic data from China triggered a steep sell-off in the Aussie and Kiwi.
Global equity markets traded higher early in the week on optimism that U.S. and China negotiations would soon resolve the trade dispute issues between the world’s two largest economies. Driving this train of thought was a pair of olive branches from China and upbeat comments from President Trump.
Firstly, China resumed buying U.S. soybeans as China’s President Xi made good on his recent pledge. Secondly, China said it would temporarily reduce tariffs on imports of American-made cars.
This optimism came crashing down on Friday following the release of disappointing data from China. The selling began in Asia early Friday after China reported industrial production and retail sales growth numbers for November which failed to meet expectations. The data served as the latest signs of a weakening economy in China. Furthermore, it exposed the risks that China is facing as it continues to battle the United States in their ongoing trade war.
China reported that industrial output grew by a modest 5.4 percent in November on a year-over-year basis, the slowest pace in almost three years. Additionally, retail sales in the world’s second largest economy, grew at their slowest rate in 15 years.
This week, most eyes will be on the interest rate and monetary policy decisions by the U.S. Federal Reserve. The Fed is widely expected to raise its benchmark interest rate 25 basis points. However, investors will be more interested in how the Fed views future rate hikes.
Fed Chair Powell will also hold a press conference. He is expected to soften his tone about the economy, which will be interpreted as him being dovish. His job is to calm the markets enough to potentially jump start another leg up in the stock market.
If successful, Treasury yields may fall as well as the U.S. Dollar, giving the Aussie and Kiwi a lift. However, if Powell comes across as too dovish then he runs the risks of driving stocks sharply lower. This will send investors into the safe-haven U.S. Dollar, putting additional pressure on the Australian and New Zealand Dollars.
Domestically, New Zealand Dollar traders will get the opportunity to react to fresh quarterly GDP data. The report is expected to show the economy grew 0.6%, down from 1.0%.
Australian Dollar traders will be watching labor market data. The Employment Change report is expected to show the economy added 20K jobs in November. This will be down from 32.8K. The Unemployment Rate is expected to remain unchanged at 5.0%.
In the U.S., Core Durable Goods Orders are expected to have risen 0.3%, up slightly from 0.2%. Final GDP is estimated to have risen 3.5%, unchanged.
Look for the Fed and especially Fed Chair Powell’s remarks to set the tone this week.