Short-covering and position-squaring after last week’s steep sell-off are helping to underpin the Australian and New Zealand Dollars on Monday. The price action indicates some investors may feel that last week’s moves were overdone to the downside.
General nervousness ahead of Wednesday’s Reserve Bank of New Zealand’s interest rate and monetary policy decisions could also be behind the price action. A bank holiday in Japan and the reopening of the markets in China after the week-long Lunar New Year are also influencing trader decisions.
Several factors influenced the price action last week. Early last week, the Reserve Bank of Australia (RBA) kept its cash rate at a record-low 1.5 percent for a 30th month but dropped its long-standing prediction that an improving economy meant the next move was likely to be upwards.
In its monetary policy statement, the RBA lowered its forecast for gross domestic product (GDP) growth for the year to the end of June to 2.5 percent, down from 3.25 percent. The RBA also slashed its inflation forecast for the 12 months to June 30 from 2 to 1.25 percent.
Futures traders started to price in at least two rate hikes by the RBA, driving the Aussie down sharply.
In New Zealand, the Kiwi fell in sympathy with the Aussie. Selling pressure was also driven by a weaker-than-expected labor market report. Like the Australian Dollar, sellers hit the New Zealand Dollar as they priced in a rate cut later in the year.
Aussie and Kiwi traders will be watching this week for new developments regarding U.S.-China trade relations as negotiations are set to begin later this week. Traders are nervous because last week White House economic advisor Larry Kudlow said there is a “pretty sizable distance to go” before China and the U.S. reach a deal. There was also a report that said U.S. President Trump and Chinese President Xi Jinping will not be meeting before the March 2 deadline to get a deal done.
Additionally, the Wall Street Journal reported last Friday that the two countries have not yet put together a draft on the matters they agree or disagree. This serves as further evidence that the two sides are still far from reaching an agreement.
Traders may set aside trade talks for a few days this week as investors prepare for Wednesday’s first interest rate decision by the RBNZ since November. The central bank is widely expected to leave its benchmark interest rate unchanged, but traders are already pricing in about a 42% chance of a rate cut as soon as June 2019.
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This article was originally posted on FX Empire
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