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James Hyerczyk
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AUD/USD

The Australian and New Zealand Dollars finished lower last week as remarks from Federal Reserve Chair Jerome Powell, a sharp rise in U.S. Treasury yields, robust U.S. jobs growth and a drop in risk sentiment weighed on the higher risk currencies.

Last week, the AUD/USD settled at .7681, down 0.0023 or -0.29% and the NZD/USD closed at .7163, down 0.0070 or -0.97%.

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Weekly Recap

In Australia, the Reserve Bank of Australia (RBA) re-committed to keep three-year yields at 0.1% until its employment and inflation objectives are met, which policymakers don’t expect until 2024 at the earliest.

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.

Australian retail sales rose by less than expected in January as a coronavirus lockdown in the city of Brisbane kept shoppers at home, continuing the see saw pattern of sales in recent months.

Sales rose 0.6% in January, from December, missing market forecasts of a 2.0% gain, preliminary data from the Australian Bureau of Statistics (ABS) showed on Friday.

Australia recorded the biggest monthly trade surplus in history as the economy continued to rack up records in a marked rebound from last year’s deep recession.

The ABS said the trade balance of goods and services was a record $10.1 billion in January and was up more than $3 billion compared with December. This was the result of a 6% jump in exports, while imports declined 2%. Economists had forecast a surplus of around $6 billion based on preliminary data released last month.

In New Zealand, New Zealand’s Central Bank Governor said on Thursday that central banks globally are prepared to over-shoot inflation targets as they battle rapidly falling prices and a dislocation in labor markets.

Orr said the world is no longer focused on the fear of returning to the problems of high inflation that led central banks to under achieve on their inflation targets for so long.

“The single biggest challenge in the world at the moment is rapidly falling prices, deflation and dislocation in the labor markets,” Orr said at the New Zealand Economic Forum in the University of Waikato.

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Weekly Forecast

The key report this week is out of the United States. On Wednesday, the government will report its February consumer inflation figures. The Consumer Price Index (CPI) is expected to come in at 0.4%, up from 0.3% and the Core CPI is expected to show a rise of 0.2%, up from 0.0%.

The potential market moving event this week occurred over the weekend when the U.S. Senate passed a $1.9 trillion coronavirus relief package on Saturday as Democrats rushed to send out a fresh round of aid.

We expect to see a volatile response to this news, but ultimately the direction will be determined by the movement in Treasury yields. Higher yields will drive the Aussie and Kiwi lower, lower yields will put pressure on the U.S. Dollar.

Traders aren’t sure how to approach the news. The bulls believe more fiscal stimulus will heat up the economy, driving up interest rates and the U.S. Dollar. The bears are looking at another flood of dollars into the financial markets and higher U.S. debt levels.

In my opinion, we could see profit-taking, position-squaring and short-covering this week as traders prepare for the release of the U.S. Federal Reserve’s monetary policy decisions on March 17. A shift in risk sentiment into higher-yielding assets will also be supportive for the Aussie and Kiwi.

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