The Australian and New Zealand Dollars closed up last week, but most of those gains occurred early in the week. The second half of the week left the Aussie and Kiwi vulnerable to a near-term correction as a surge in U.S. Treasury yields quickly turned the beaten and bruised U.S. Dollar into a more desirable investment.
We don’t expect to see a major change in trend, but we’re not going to be surprised by a meaningful correction since some of the weak longs have probably been waiting for any excuse to lighten up on the long side and book some profits following a more than two-month rally.
Focus Shifts from Demand for Risk to Federal Reserve Policy
Pressure started to increase on the Aussie and Kiwi about mid-week as investors speculated on when the U.S. Federal Reserve might taper its asset buying, sending longer-dated Australian yields to six-month highs. Earlier in the week, the Australian Dollar hit a 2-1/2 year peak and the New Zealand Dollar reached its highest level since mid-2015.
According to Reuters, dealers said speculators pared some short positions in the U.S. Dollar on speculation the Fed would not now increase its bond buying program, given the rollout of coronavirus vaccines had improved the economic outlook for later in the year.
Instead, some officials had talked about tapering the purchases late in 2021, sooner than many in the market had anticipated.
That combined with talk of more fiscal stimulus as Democrats took control of the Senate to push longer-term Treasury yields higher and gave the U.S. Dollar a lift after weeks of losses.
Jump in US Yields Drag Aussie Yields Higher
Australian 10-year yields followed almost in lock step to reach 1.09% and keep the spread with the U.S. around zero. That left yields up 11 basis points for the week and at the highest level since June.
Three-year yields remain pinned near the Reserve Bank of Australia’s (RBA) target of 0.10%, thus widening the spread with 10-year paper to 98 basis points which, barring a brief spike last March, is the steepest since mid-2015.
There are no major reports from Australia and New Zealand this week. In the U.S., the potential market moving events are a speech from Federal Reserve Chairman Jerome Powell on Thursday and Friday’s U.S. Retail Sales report.
Traders will be looking at Powell for any comments on Federal Reserve bond purchases.
The RBA is probably hoping that rising U.S. Treasury yields pressure the Australian Dollar. This is because an expensive Aussie could weigh on Australian exports. The rising Australian Bond yields could serve as a tightening mechanism that will probably encourage the RBA to continue to extend its A$100 billion bond buying program in coming months.
Furthermore, if the RBA decides to taper some of its Quantitative Easing (QE) or if it adjusts its 3-year bond target then the Australian Dollar could surge to the upside. This is not what the RBA wants to see.
For a look at all of today’s economic events, check out our economic calendar.