The Australian and New Zealand Dollars are nudging higher on Tuesday after posting strong moves the previous session. Yesterday’s rally was fueled by a jump in demand for higher risk currencies. The catalyst behind the rally was increased confidence in the global economy and world trade amid progress on a COVID-19 vaccine and the prospect of Joe Biden being president.
The so-called “risk-on” currencies are being underpinned as Biden announced his first steps as president and Pfizer Inc and its German partner BioNTech SE announced that their experimental COVID-19 vaccine was more than 90% effective in initial trial results in what experts said could be a turning point toward halting the pandemic.
A Biden presidency is expected to shore up international trade through steady policies and the prospect of a successful coronavirus vaccine is seen as a major tailwind.
Gains may have been limited by rising Treasury yields as investors speculated that the vaccine could allow the U.S. economy to grow fast enough to drive up interest rates.
Central Bank Activity
Despite the early strength, buyers looked a little tentative on Tuesday as investors debated whether yesterday’s rally in the U.S. stock market was an overreaction to the news. This suggests it may be ripe for profit-taking especially coming off last week’s dovish central bank announcements.
The Reserve Bank of Australia (RBA) this month cut and vowed to maintain its cash rate at 0.10% and shifted to quantitative easing (QE), while its counterpart in New Zealand (RBNZ) is expected to announce a cheap funding facility for banks on Wednesday and cut rates below zero next year.
Australian yields had been falling after the RBA’s bond-buying announcement, but bonds were now tracking the direction of U.S. rates, which were sold off following Pfizer’s findings.
On Tuesday, ten-year Australian bond yields were 13 basis points higher at 0.91%, while three-year bonds were half a tick higher at 0.11%.
The mirroring dynamic was likely to continue while the trajectory of yields in the near term was uncertain, analysts said.
Control of the U.S. Senate won’t be known until January, and rolling out an effective vaccine to enough people is unlikely to be quick enough to prevent further restrictions on activity and movements.
“It seems likely that more stimulus – monetary and fiscal – is likely to come. With COVID-19 cases reaching new highs in the U.S., it is hard to see the services sector growing strongly in the near term,” Australia and New Zealand Banking Group strategists said.
“The combination of a slowing recovery and possible lackluster fiscal support will likely lead to the Fed providing more stimulus, most likely through more bond purchases. This should cap the upside in yields.”
We could see a sideways to lower trade on Tuesday if U.S. stock market investors decide to take profits after yesterday’s steep run-up. Volume could be light as well as volatility as investors shift their focus to the RBNZ monetary policy announcements.
Demand for risky assets and expectations of more fiscal and monetary stimulus in the U.S. could keep the Aussie and Kiwi underpinned. The recent moves by the RBA and the expected moves by the RBNZ as well as the two countries’ ability to control the pandemic have us leaning to the upside at this time.
For a look at all of today’s economic events, check out our economic calendar.