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James Hyerczyk

The Australian and New Zealand Dollars finished higher last week as investors adjusted positions to reflect the 100% probability of a U.S. Federal Reserve rate cut in late July, and increasing chances of additional rate cuts in September and December.

The New Zealand Dollar outperformed the Australian Dollar because traders expect the Reserve Bank of New Zealand (RBNZ) to leave rates on hold when they make their interest rate decision on Wednesday, June 26. The Aussie’s gains were likely limited because the Australian markets are now pricing in a 70% chance of a Reserve Bank of Australia (RBA) rate cut on July 2. This is up from the 50% level posted after the central bank released the minutes from its last monetary policy meeting on June 17.

Last week, the AUD/USD settled at .6926, up 0.0054 or +0.79% and the NZD/USD finished at .6588, up 0.0096 or +1.48%.

Australian Dollar

Traders turned increasingly dovish about a rate cut after RBA Governor Lowe said in a speech last week that it is not too unrealistic to expect a further reduction in interest rates as there is considerable spare capacity in the labor market despite strong jobs growth. “The possibility of lower interest rates remains on the table,” Lowe said.

His comment prompted forecasters to price in a 0.25% reduction in the cash rate at the bank’s next monetary policy meeting in July or in August.

In other news, yields on Australian 10-year bonds fell to a record low of 1.3% and although the Australian Dollar rallied due to a weaker greenback, traders expect it will soon resume its downtrend as the RBA slashes the cash rate.


New Zealand Dollar

Not only did the New Zealand Dollar last week because of the weaker U.S. Dollar, but also because the market implies around a 31% chance of a quarter-point cut in the 1.50% cash rate this week. And 86% for August. A further move to 1% is priced in by early next year.

“The balance of risks has evolved in the direction of another cut, mainly due to global developments, but not so emphatically that the RBNZ needs to appear panicked by cutting the OCR again so soon,” argued Westpac’s chief New Zealand economist Dominick Stephens.

Weekly Forecast

The Australian Dollar will be in focus early in the week when RBA Governor Lowe delivers a speech early Monday. He could pressure the AUD/USD if he reiterates the need for lower interest rates.

On Tuesday, the focus will be on the Conference Board’s Consumer Confidence report and a speech by Fed Chair Jerome Powell. Traders will be looking to react to any comments about monetary policy, the strength of the economy and the timing of potential rate cuts.

Also in the U.S. this week, investors will get the opportunity to react to the latest reports on Durable Goods and Final Gross Domestic product.

Finally, on Wednesday, expect the Reserve Bank of New Zealand to leave interest rates unchanged, while reiterating its easing bias and highlighting the risks to global growth. The RBNZ could also express concerns about rate cuts in the United States and Australia since they will have an impact on the value of the New Zealand Dollar.

The RBNZ is likely to cut again to 1.25% in August. The bond market is already way ahead of the central bank with yields on two-year government paper at record lows of 1.125%.

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