James Hyerczyk
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Three-factors contributed to the mixed performances in the Australian and New Zealand Dollars last week – U.S.-China trade relations, an unexpected central bank decision and a surprisingly weak economic report.

Mixed headlines over the progress of the trade talks between the two economic powerhouses led to a choppy, two-sided trade with money leaving the Aussie and Kiwi for the safety of the Japanese Yen. An unforeseen policy decision by the Reserve Bank of New Zealand (RBNZ) triggered a short-covering rally, which spiked the Kiwi higher. Meanwhile, weak employment data drove up the chances of another rate cut by the Reserve Bank of Australia (RBA), scorching the Aussie Dollar.

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Last week, the AUD/USD settled at .6821, down 0.0038 or -0.56% and the NZD/USD finished at .6402, up 0.0075 or +1.19%.

Australian Dollar

The Australian Dollar closed lower last week with most of the loss occurring on November 14  after the Australian 10-year government bond yield slumped to over a 1-week low after the country’s employment report for the month of October created a surprise disappointment among investors, as the jobless rate rose and the employment change slumped.

The 19,000 drop in employment in October was the largest decline in three years and well-below the Bloomberg median forecast of a rise of 15,000. Annual employment growth eased from 2.5 percent in September to 2.0 percent in October, the report added.

“Further, the unemployment rate bounced back from 5.2 percent to 5.3 percent and the only reason why it didn’t rise even more was that the participation rate fell for the second consecutive month. Our view is that the participation rate is more likely to rise in coming months adding further upward pressure on the unemployment rate,” Capital Economics further noted in the report.

The news has rekindled expectations the RBA will have to cut official rates. This drove the Australian Dollar sharply lower. Traders are expecting a rate cut in February 2020, but some may try to build a case for a December cut.


New Zealand Dollar

The New Zealand Dollar finished the week sharply higher after wholesale interest rates spiked after the Reserve Bank left its official cash rate (OCR) unchanged at 1 percent. Market expectations were weighted towards a rate cut at today’s monetary policy statement.

Analysts described the RBNZ’s decision as a surprise with several indicating the central bank’s new growth outlook still appears too rosy. The financial markets are now pricing in a February or May rate cut. To some, the market reaction showed the positioning ahead of the policy announcement was clearly the wrong way.

The RBNZ, in its statement, said further monetary stimulus would be added if needed. It said employment remained around its maximum sustainable level while inflation remained below the 2 percent target midpoint but within its target range.

“Economic developments since the August statement do not warrant a change to the already stimulatory monetary setting at this time,” it said.

Weekly Forecast

The key economic reports this week are the RBA Monetary Policy Meeting Minutes on Tuesday and Friday’s ISM US Flash Manufacturing PMI report.

However, most of the focus this week will be on the progress of the U.S.-China trade talks after last week ended on an optimistic note with high ranking U.S. officials pushing all the positive news buttons.

White House economic adviser Larry Kudlow said on Thursday that negotiations over the first phase of a trade agreement with China were coming down to the final stages, with the two sides in daily contact.

U.S. Commerce Secretary Wilbur Ross said in an interview on Fox Business Network Friday that there was a very high probability the United States would reach a final agreement on a phase one trade deal with China.

Furthermore, there was a potentially bullish development over the week-end. According to Chinese state media, Chinese Vice Premier Liu He spoke with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer about a phase-one trade deal in a phone call Saturday morning.

The two sides had “constructive discussions” about “each other’s core concerns” and agreed to remain in close contact, Xinhua reported. The call came at the request of Mnuchin and Lighthizer, according to Xinhua.

Nonetheless, there are still skeptics out there. “To be blunt, such rhetoric is more or less the same as Steven Mnuchin (who) said months ago that a deal was ‘99% done’, Commerzbank analysts wrote in a note to clients, though they acknowledged the comments had benefited sentiment.

Aussie and Kiwi traders are going to continue to make adjustments to their positions in reaction to the chances of further rate cuts by the RBA and RBNZ, respectively. However, most eyes will be on the progress of the trade talks that could make bearish traders forget about the problems in the Australian and New Zealand economies, at least over the short-run.

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