AUD/USD and NZD/USD Fundamental Daily Forecast – Will RBA Resort to ‘Tough Talk’ to Defend Its Credibility?The RBA is widely expected to reinforce its forward guidance for three more years of near-zero rates, while also addressing the market dislocation.
The Australian and New Zealand Dollars are edging lower early Tuesday as investors await the release of the latest monetary policy and interest rate decision from the Reserve Bank of Australia (RBA).
On Monday, the Aussie and Kiwi recovered some lost ground against the U.S. Dollar, after suffering their biggest plunges in a year at the end of last week amid a hefty sell-off in global bond markets.
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The Aussie, Kiwi and greenback have taken cues from the global bond market, where yields have surged in anticipation of an accelerated economic recovery. The aggressive bond selling implies a bet that global central bankers will need to tighten policy much earlier than they have so far been forecasting.
Australian Dollar Investors Look to RBA for Guidance
The Reserve Bank of Australia will hold its monthly policy meeting on Tuesday, and markets are widely expecting it to reinforce its forward guidance for three more years of near-zero rates, while also addressing the market dislocation.
After last week’s rout of the Australian Dollar, the focus is now squarely on the looming policy meeting of the Reserve Bank of Australia (RBA). Late last week as Australian Government bonds were crashing, the RBA stepped up bond buying, and any further warning against rising yields could cap its latest rebound.
“The market has been in a euphoria for some time and everybody says the dollar will weaken on rising risk appetite. But oil prices dipped yesterday and gold also slipped. If commodity markets are waking up to the reality, then we could see some weakness in commodity-linked currencies,” said Makoto Noji, chief FX strategist at SMBC Nikko Securities.
The jump in bond yields has also shifted the focus to the U.S. economy.
“USD direction is likely to hinge on not only the direction, but also the pace, of global bond moves,” Commonwealth Bank of Australia strategists wrote in research note.
Bond moves are trumping economic data as the driver of foreign-exchange markets, with yields moving “well in advance” of economic fundamentals, they said.
“The risk is tilted to a firmer USD this week because we doubt central banks will intervene in any meaningful way yet.”
The RBA could use some tough language to get the point across that it is calling the shots about the economy, but it’s unlikely to curtail a deepening divide between traders and central banks over the pace of the economic recovery.
Policymakers fear the so-called reflation trade, already rippling through all markets, could seep into economies that have yet to rebound from the coronavirus shock, according to businesstimes.com.
“Reflation now needs a rein, and central banks are fighting the sharp rise in yields,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “Their credibility is at stake here too – if they want to maintain accommodative policy they have to act if markets look like they’re running away.”
For a look at all of today’s economic events, check out our economic calendar.