AUD/USD and NZD/USD Fundamental Daily Forecast – Underpinned by Risk Sentiment, Capped by Rising Yield Fears
The Australian and New Zealand Dollars are trading mixed early Wednesday after data out of China and Australia failed to generate any meaningful upside momentum.
Despite economic data from China and Australia, the price action suggests investors are still eyeing the movement in U.S. Treasury yields for direction. Bullish investors are hoping that lower Treasury yields help to restore some calm to global markets and reignite demand for riskier assets.
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It’s All About Bond Yields
On Tuesday, lower U.S. bond yields sapped some of the U.S. Dollar’s allure, helping to boost the commodity-linked currencies.
Bonds have been at the center of a storm in financial markets in recent weeks, following a dramatic jump in yields globally – but led by Treasuries – in defiance of central bankers’ insistence on patience in normalizing monetary policy as economies recover from the COVID-19 pandemic, according to Reuters.
Additionally, fiscal stimulus has fueled market expectations for a rapid recovery, with President Joe Biden close to passing a $1.9 trillion spending package.
Essentially, risk sentiment is controlling the currency market at this time. So in addition to the movement in the bond yields, Aussie and Kiwi investors are also watching the impact of higher rates on global equity markets.
If the bond selling resumes then stocks will fall with them as yields rise. This move would crush the Aussie and Kiwi by driving the U.S. Dollar sharply higher.
Australian Economy Storms Ahead as COVID Recovery Turns ‘V-shaped’
Australia’s economy expanded at a much faster-than-expected pace in the final quarter of last year and all signs are that 2021 has started on a firm footing too helped by massive monetary and fiscal stimulus.
The economy accelerated 3.1% in the three months to December, data from the Australian Bureau of Statistics (ABS) showed on Wednesday, higher than forecasts for a 2.5% rise and follows an upwardly revised 3.4% gain in the third quarter.
Despite the best ever back-to-back quarters of growth, annual output still shrank 1.1%, underscoring the havoc wreaked by the coronavirus pandemic and suggesting the policy support will still be needed for the A$2 trillion ($1.57 trillion) economy.
“The ‘V-shaped’ nature of the recovery is everywhere to see – economic growth, the job market, retail spending and the housing market,” said Craig James, Sydney-based chief economist at CommSec.
James expects the economy to rebound 4.2% in 2021.
Traders showed little reaction to the Australian GDP report and the lull in volatility this week could prove fleeting if an improving U.S. economy reignites bond selling, with closely watched monthly payroll figures due on Friday.