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James Hyerczyk

The Australian and New Zealand Dollars finished higher last week after the Fed cut its benchmark rate and investors slashed the chances of further rate cuts by the Reserve Bank of Australia and the Reserve Bank of New Zealand. On Friday, stronger-than-expected U.S. jobs data helped limit gains, but both currencies quickly recovered after China expressed optimism over the progress of trade negotiations.

Last week, the AUD/USD settled at .6913, up 0.0092 or +1.35% and the NZD/USD finished at .6428, up 0.0078 or 1.23%.

Australian Dollar

In a speech early Tuesday, Reserve Bank Governor Philip Lowe effectively ruled out the possibility of cutting its official interest rates below zero and urged business to take advantage of the already historically low borrowing costs.

“It is extraordinarily unlikely that we will see negative interest rates in Australia,” Dr. Lowe said in a prepared speech in Canberra.

Dr. Lowe said negative interest rates were having a “pernicious” effect on the financial system and pensions in Europe. He further added that previously unviable big investments were now making economic sense at current historically low interest rates.

Finally, Lowe reiterated that interest rates in Australia will still have to be kept low for an extended period to reach the goals of full employment and inflation back within the RBA’s 2-to-3 percent target.

After the speech, market participants cut back their expectations on further rate cuts from the RBA, a trend that began weeks ago.

From a 50/50 bet at the start of the month that the cash rate would be cut again at the RBA board’s Cup Day meeting, the chance of a cut next week is now priced at just 10 percent.

As well, the 30-day cash rate futures curve no longer has a full 25 basis point cut priced in over the foreseeable future. This represents a change in sentiment that will ease pressure on the RBA to move again quickly.


New Zealand Dollar

The rally in the NZD/USD last week started to pick up steam after Westpac economists changed their calls on New Zealand interest rates and now expect no cut at the Reserve Bank of New Zealand’s (RBNZ) policy meeting on November 13.

The bank previously forecast a 25-basis point cut, although it has said it would be a close call. Westpac now expects the cut –to 0.75 percent – to occur next February.

“The Reserve Bank’s forecasts and rhetoric had been 50/50 on whether a cut might be required at some stage, but we thought a rash of downside surprises would prompt the Reserve Bank to cut as soon as November,” Westpac chief economist Dominick Stephens said in a commentary.”

“That is not the way the dice have fallen. True, economic growth remains subdued and business confidence is very low. But on balance the outlook and employment has actually lifted a little since August, because the exchange rate is well down, inflation has surprised to the upside, and the housing market is stirring,” Stephens said.

Weekly Forecast

The Aussie and Kiwi could see further upside action this week due to improving financial market sentiment, and the interpretation that RBA and RBNZ have taken rates far enough for now. Good news over U.S.-China trade relations could put further pressure on the U.S. Dollar if traders continue to sell out of protective hedges.

This week, investors will get the opportunity to react to the latest Australian Retail Sales report early Monday. The RBA Rate Statement on Tuesday and the RBA Monetary Policy Statement on Friday.

In New Zealand, investors will be watching the Employment Change and Unemployment Rate reports.

In the U.S., the key report is ISM Non-Manufacturing PMI.

The big story this week is likely to be U.S.-China trade relations, given the news from Friday.

China said Friday it reached a consensus in principle with the U.S. during trade talks this week. The U.S. Trade Representative’s office also said Robert Lighthizer and Treasury Secretary Steven Mnuchin made “progress in a variety of areas and are in the process of resolving outstanding issues.”

The Chinese Commerce Ministry on Friday said the world’s two largest economies had reached “consensus on principles” during a “serious and constructive” telephone call between their main trade negotiators.

U.S. President Donald Trump said over the weekend he hoped to sign an agreement with Chinese President Xi Jinping at a U.S. location, perhaps in the farming state of Iowa.

“China wants to make the deal very much,” Trump told reporters at the White House on Friday evening. “I don’t like to talk about deals until they happen, but we’re making a lot of progress.”

AUD/USD and NZD/USD traders will be looking for further developments this week.

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