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James Hyerczyk
AUD/USD and NZD/USD
AUD/USD and NZD/USD

The Australian and New Zealand Dollars are trading lower on Thursday following steep plunges the previous session. Both currencies were hit by a sharp rise in U.S. Treasury yields on the back of solid U.S. economic data. The Aussie was also punished by weak domestic data. Essentially, it is the divergence between monetary policies of the hawkish U.S. Federal Reserve and dovish Reserve Bank of Australia that is making the U.S. Dollar a more attractive investment.

At 0525 GMT, the AUD/USD is trading .7082, down 0.0020 or -0.27% and the NZD/USD is at .6492, down 0.0022 or -0.35%.

Today’s weakness is enough to drive the Forex pairs through their September bottoms. For the AUD/USD, a sustained move under .7085 could generate the downside momentum needed to drive the Forex pair into the February 9, 2016 main bottom at .6973. If NZD/USD sellers continue to pound prices lower, we could see a near-term test of the January 20, 2016 bottom at .6346.

In the U.S. on Wednesday, solid U.S. private sector payrolls data and an extremely strong services report help drive Treasury yields to multi-year highs. The benchmark 10-year note yield traded near 3.14 percent, hitting its highest level since 2011. The 30-year bond yield, meanwhile, reached its highest level since October 2014.

In economic news, ADP reported that private payrolls increased by 230,000 in September, the most since February. This beat the 185,000 forecast and probably sets the table for a strong U.S. Payrolls number on Friday.

The ISM non-manufacturing index reached its highest level on record, according to data released Wednesday. The services report came in at 61.6, well-above the 58.0 forecast.

The Forex pairs were further pressured by comments from U.S. Federal Reserve Chairman Jerome Powell who said the central bank will continue to raise interest rates at a gradual pace in order to extend the economic recovery while keeping inflation in check.

The Australian Dollar’s decline started early Wednesday after the release of weaker-than-expected local building approvals data. Approvals tumbled 9.4 percent in August, led by a decline in the high-density housing sector. A downtrend in the data has been clearly established and has intensified in recent months. Additionally, weaker housing demand and falling house prices are increasingly weighing on residential construction activity.

In New Zealand, sellers continued to react to the possibility of an interest rate cut in the near future.

Forecast

In Australia on Thursday, the Australian Bureau of Statistics reported Australia’s trade surplus rose four percent to $1.6 billion in August, despite falling revenue from mining and metal exports, with a jump in fuel, gold, meat and wool exports contributing to the overall rise.

Traders showed little reaction to the news because the focus for traders at this time is the widening interest rate differential between U.S. Government bond yields and Australian and New Zealand Government bond yields. This move is also making the U.S. Dollar a more attractive investment.

In the U.S. on Thursday, investors will get the opportunity to react to three more economic reports and a speech from a U.S. FOMC member.

The Challenger Job Cuts report is the first report. Last month it came in up 13.7 percent. Weekly Unemployment Claims are forecast at 214K, unchanged from last week. Factory orders are expected to rise 2.2 percent, up from 0.8 percent.

FOMC Member Randal Quarles is also scheduled to speak. Traders will be looking for commentary on monetary policy especially his opinion on inflation and the labor market. He may also offer his opinion on the pace of future interest rate hikes.

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