The Australian and New Zealand Dollars are trading sharply lower shortly before the close on Wednesday. The selling pressure is being driven by an extremely dovish revelation by Reserve Bank of Australia Governor Philip Low early in the session. Kiwi traders are also squaring positions ahead of a New Zealand job market report at 21:45 GMT.
The AUD/USD plunged on Wednesday after Reserve Bank Governor Philip Lowe suggested an interest rate hike was less likely than the central bank had previously signaled.
“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Dr. Lowe said. “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”
Dr. Lowe said the bank’s decision would be particularly influenced by consumer spending in housing slump, the unemployment rate and overseas geopolitical instability.
“In the event of a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point,” Mr. Lowe said.
However, he said the board did “not see a strong case” for a change in the cash rate in the near term.
Some traders said the sell-off was an overreaction to the comments. The move may have been exaggerated because during the previous session, buyers misread the RBA’s monetary policy statement as less-dovish as expected.
On Tuesday, the RBA held its cash rate at 1.50 percent since the second half of 2016, or 30 months, and its policy decision was seen to be dovish, briefly sending the currency higher.
New Zealand Dollar
The NZD/USD fell sharply on Wednesday in sympathy with the Australian Dollar. The price action demonstrates a difficult balancing act facing central bank policymakers as they try to manage market expectations and ease pressure on growth.
Traders are also saying that pressures are building on the Reserve Bank of New Zealand to cut interest rates rather than raise them.
According to ANZ Bank’s Quarterly Economic Outlook for January 2019, “Tighter financial conditions and waning global growth continue to weigh on the outlook for monetary policy in New Zealand, while the domestic backdrop also looks more challenging. We now see the next move in the Official Cash Rate (OCR) as being downward, with a cut penciled in for November and another 50 basis points of cuts to follow in 2020.”
In Australia, investors will get the opportunity to react to the latest AIG Construction Index and the NAB Quarterly Business Confidence report. China is on bank holiday.
In New Zealand, the major reports are quarterly Employment Change, Unemployment Rate and the Labor Cost Index.
The Employment Change is expected to have risen 0.3%, down from 1.1%. The Unemployment Rate is forecast to have risen to 4.1%, up from 3.9%. The Labor Cost Index is expected to have risen by 0.6%, up from 0.5%.
Misses to the downside could send the NZD/USD sharply lower amid concerns the RBNZ is gearing up for a rate hike later this year.
Please let us know what you think in the comments below.
This article was originally posted on FX Empire
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