The Australian and New Zealand Dollars finished lower last week, weighed down by lingering domestic issues. A plunge in U.S. Treasury yields on Friday drove the U.S. Dollar lower, lending a little support to the beat up Aussie and Kiwi, while helping to reduce some of their earlier losses in the week. Looking ahead, escalating tensions between the United States and China could keep a lid on the Australian and New Zealand Dollars.
The Aussie received a boost early in the week when the Reserve Bank of Australia (RBA) Monetary Policy Minutes showed policymakers were willing to “wait and see” how the economy does after a pair of rate cuts in June and July. This helped reduce the chances of a September rate cut.
The New Zealand Dollar drifted lower all week until Friday. The selling pressure was enough to take out the August 7 bottom that was reached after the Reserve Bank of New Zealand (RBNZ) shocked the markets with an unexpected 50-basis point rate cut.
The kiwi jumped from a three-and-a-half-year low after RBNZ Governor Adrian Orr said he was “pleased” with where interest rates were, dampening expectations of another rate cut in September.
Looking at the bigger picture, President Trump triggered a steep break in the U.S. Dollar when he tweeted, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”
The move by the greenback indicates there are increasing concerns that Trump’s latest comments will push the U.S. economy into a recession.
Although the biggest reaction in the markets was to Trump’s tweet, remarks from Federal Reserve Chairman Jerome Powell did put some pressure on the dollar due to their dovish nature.
Powell did not announce a major stimulus measure to ease concerns over a slowdown in global economic growth, but did prepare investors for further interest rate cuts. Powell acknowledged the U.S. economy was in a “favorable place” and the Fed would “act as appropriate” to keep the current economic expansion on track.
On Friday, after Trump’s initial Twitterstorms, the President announced that Washington will impose an additional 5% duty on Chinese goods. Trump said the United States would raise its existing tariffs on $250 billion worth of Chinese imports to 30% from the current 25% beginning on October 1, the 70th anniversary of the founding of the communist People’s Republic of China.
At the same time, Trump announced an increase in planned tariffs on the remaining $300 billion worth of Chinese goods to 15% from 10%. The United States will begin imposing those tariffs on some products starting September 1, but tariffs on about half of those goods have been delayed until December 15.
Given China’s retaliatory tariffs on Trump’s August 1 tariffs and the financial market’s reaction, we have to expect China to hit the U.S. with a countermeasure that could put further pressure on the AUD/USD and NZD/USD this week.
Later this week, Aussie and Kiwi investors will get the opportunity to react to a number of major U.S. economic reports. These reports include Durable Goods, Conference Board Consumer Confidence, Preliminary GDP and Personal Spending.
U.S. Preliminary GDP is expected to come in at 2.0%, down from the first estimate of 2.1%. This is the major report in my opinion because this will let investors know how much closer the economy has moved toward a recession. Remember, the classic definition of a recession calls for 2 consecutive quarters of negative economic activity.
In New Zealand, the major report is ANZ Business Confidence. This report will tell investors how the business community feels about the economy.
In Australia, investors will be paying close attention to reports on Business Approvals and Private Capital Expenditure.
Late Friday, China will report on Manufacturing PMI. This could impact the markets early next week.
This article was originally posted on FX Empire
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