The Australian and New Zealand Dollars posted dramatic technical closing price reversal tops last week, perhaps signaling the end to their 12 week rallies. A shift in investor sentiment was responsible for the quick reversal in the currencies. This change was driven by a dire outlook for the U.S. economy by the U.S. Federal Reserve and worries about a second-wave of COVID-19.
Fed Officials: US Economy to Shrink 6.5% in 2020, No Rate Hike Through 2022
It was this Fed forecast that rattled Aussie and Kiwi investors enough to encourage aggressive profit-taking.
On June 10, the Federal Reserve said it will keep buying bonds to maintain low borrowing rates and support the U.S. economy in the midst of a recession. And it said nearly all the Fed’s policymakers foresaw no rate hike through 2022.
The central bank noted in a statement after its policy meeting ended Wednesday that the viral outbreak has caused a sharp fall in economic activity and surge in job losses.
Fed officials estimate that the economy will shrink 6.5% this year, in line with other forecasts, before expanding 5% in 2021. It foresees the unemployment rate at 9.3%, near the peak of the last recession, by the end of this year. The rate is now 13.3%.
At a virtual news conference Wednesday afternoon, Chairman Jerome Powell is expected to drive home the message that the economy remains in need of extraordinary help despite recent despite glimmers of a possible recovery, including a government report Friday that employers surprisingly added jobs in May.
Demand for Risky Assets Pauses as Virus Worries Mount
Global stocks tumbled last Thursday and bonds rallied on fears a rise in new coronavirus cases could hurt a rush to open economies. Lockdown measures to curb the virus’ spread had triggered a prolonged economic slowdown, a threat investors broadly looked past in recent weeks as they focused on improving data and support from the U.S. Federal Reserve.
Fed Chairman Powell on Wednesday said it was evident that if there were a second wave of the virus, it could hurt the economic recovery. Still U.S. Treasury Secretary Steven Mnuchin said on Thursday the United States would not let the coronavirus shut down its economy again.
All eyes are likely to be on the global coronavirus numbers because they have once again moved to the forefront. Whether they cause another global economic shutdown is not known at this time, but there are enough concerns to encourage investors in higher-yielding assets like the Australian and New Zealand Dollars to take a time out from the buying and book some profits, while assessing the new data.
If the COVID-19 numbers continue to grow then this in itself will keep a lid on prices, however, if the governments are able to control the numbers and keep the economic damage at a minimum then the rallies are likely to resume. But perhaps not at their recent 12-week paces.
If demand for risk resumes then the U.S. Dollar is likely to weaken and this should be enough to underpin the Aussie and Kiwi. However, traders may have to be a little patient as officials monitor the new coronavirus numbers.