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James Hyerczyk

The Australian and New Zealand Dollars are trading mixed on Thursday with domestic reports driving most of the price action early in the session and the Federal Reserve expected to move the Forex markets late in the day. Essentially, the early momentum in the market is being fueled by what investors believe the Reserve Banks of Australia and New Zealand will do in the near future in response to the economic data and not so much the Fed announcements.

At 08:07, the AUD/USD is trading .6890, up 0.0016 or +0.23%, and the NZD/USD is at .6605, down 0.0008 or -0.12%.

Australian Dollar

The Australian Dollar rebounded from early session weakness after a quarterly consumer inflation report showed a slightly higher than expected bounce. The news helped ease the pressure on the Reserve Bank to cut interest rates in the near future. The rally we’re seeing is being fueled by short-covering as bearish traders adjust positions to the news.

The Consumer Price Index (CPI) rose 0.6 percent over the quarter, while increasing to 1.6 percent for the year. A spike in fuel prices and medical cost contributed to the gain.

Additionally, core inflation, an average of the trimmed mean and weighted median measures and regarded as the RBA’s preferred measure, came in at 1.4 percent over the year, the same as the first quarter reading and the weakest reading since the series started in 2003.

The data also marked the 14th consecutive quarter core inflation has come in below the Reserve Bank’s 2-3 percent target band.


Impact on RBA Policy

Consumers may have to wait a little longer to see any further reduction in the interest rate on their loans. This is because, the data, while weak, does not necessarily increase the pressure on the RBA for another cut at the upcoming August 6 board meeting.

The AUD/USD is trading higher after the consumer inflation report because traders are reducing the chances of a rate cut in August. However, the RBA is still likely to cut rates again in October after it receives more information on the labor market, growth and the initial impact of both the government’s tax refunds and the June/July rate cuts.

New Zealand Dollar

The New Zealand Dollar is trading lower after a gauge of New Zealand’s business tone hit an 11-month low in July. An especially weak construction sector as well as growing concerns about the global economy and local policies, apparently set the gloomy mood.

The NZD/USD fell to a 3-month low after the release of the closely watched survey from ANZ Bank as the news drove up the chances of a Reserve Bank rate cut on August 6.

The ANZ Business Confidence report came in at -44.3. This was worse than the previously reported -38.1.

“The outlook for the economy is deteriorating…we expect two more OCR cuts this year, helping the economy to find its feet once more,” ANZ chief economist Sharon Zollner said in a research not accompanying the release.

China’s Factory Activity Contracts

China’s factory activity contracted for the third straight month in July, according to official data released earlier on Wednesday.

The official manufacturing Purchasing Managers’ Index (PMI) for July came in at 49.7, according to data from the Chinese statistics bureau. Economists polled by Reuters had expected factory activity in China to edge up to 49.6 from June’s reading of 49.4. A PMI reading above 50 indicates expansion, while those below that signal contraction.

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