The Australian and New Zealand Dollars finished mixed last week with the Aussie showing weakness and the Kiwi closing higher.
In Australia, the Reserve Bank of Australia Meeting Minutes showed the central bank is not in a hurry to raise interest rates due to concerns over housing, consumer credit and low wages.
The Australian Employment Change showed the economy added 17.5K jobs in February, below the 19.8K estimate. The previous month’s figure was revised down to 12.5K. The Unemployment Rate rose 5.6%, above the 5.5% estimate.
New Zealand News
In New Zealand, the Reserve Bank of New Zealand kept its Official Cash Rate unchanged at the record low of 1.75 percent for the ninth straight meeting, as widely expected, saying modest interest rates would help spur economic growth.
The only difference between Wednesday’s RBNZ statement and the previous one was that it dropped any reference to the New Zealand Dollar in the latest one, probably because the NZD has been relatively stable.
In summary, the RBNZ presented an optimistic tone on the global economy but noted that international pressures are beginning to build and developed world monetary policies are becoming less stimulatory.
“CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges…Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent,” the RBNZ said, in its statement.
In the U.S., the Federal Reserve raised rates for the sixth time since the policymaking Federal Open Market Committee (FOMC) began hiking rates off near-zero in December 2015. The widely expected move put the benchmark funds rate at a target of 1.5 percent to 1.75 percent.
The Fed also upgraded its economic forecast, and dropped hints that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years. The fact that traders were pricing in a 38-percent chance of four rates hikes probably led to dollar weakness.
Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.
Inflation expectations changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation.
In other news, President Donald Trump signed an executive memorandum on March 22 that would impose retaliatory tariffs on up to $60 billion in Chinese imports.
The new measures are designed to penalize China for trade practices that the Trump Administration says involve stealing American companies’ intellectual property.
The U.S. Dollar weakened on the fear that China is likely to retaliate against the tariffs by targeting U.S. agricultural products that are reliant on the Chinese export market.
We’re expecting volatility and a possible two-sided trade this week as investors continue to fear the start of a trade war between the U.S. and China.
If equity markets continue to retreat then this will drive up demand for safe haven assets, leading to a drop in U.S. Treasury yields. This will weaken the U.S. Dollar and make the Australian and New Zealand Dollars more attractive assets.
Over the long-run, however, the downbeat messages of the RBA and RBNZ on Australian and New Zealand inflation rates, respectively, should keep a lid on any rallies by frustrating bullish traders. Those hoping for an interest rate hike in the near future are likely to continue to be disappointed because their central banks are not likely to raise rates until inflation pressures pick up. Without any inflation to contain, there are just no reasons to raise rates.
Key reports this week include U.S. CB Consumer Confidence and Final GDP. In New Zealand, investors will get the opportunity to react to the latest data on ANZ Business Confidence.