Aussie, Kiwi Wilt as Hawkish Fed Talk Weighs on Risky Assets

The Australian and New Zealand Dollars put in a mixed performance on Thursday with the Aussie closing lower and the Kiwi finishing higher, but both had one thing in common. They closed well off their highs.

The Aussie and Kiwi showed strength early in the session as the technical picture improved amid a sell-off in the U.S. Dollar and a dip in U.S. Treasury yields. Both moves were fueled by Wednesday’s U.S. consumer inflation report and Tuesday’s comments from Fed Chair Jerome Powell that suggested the Federal Reserve may not be in such a hurry to raise interest rates.

Additionally, most of the earlier gains were due to a pullback in the U.S. Dollar rather than any improvements in domestic fundamentals.

On Thursday, the AUD/USD settled at .7280, down 0.0004 or -0.06% and the NZD/USD finished at .6864, up 0.0017 or +0.25%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed at $72.18, down $0.12 or -0.17%.

Uncertainty over Strength of Australia’s Economy

In Australia, a spike in coronavirus cases has disrupted what had been a strong economic recovery, hitting spending, supply chains and mobility. Westpac noted spending on its cards fell sharply in the first two weeks of the year, having hit record highs in December.

Whether consumers will spend their way through the resurgence of coronavirus will test the Reserve Bank of Australia’s (RBA) optimism that the economy could easily weather the spread of the Omicron variant and complicate its decision on whether to end its bond buying campaign in February.

Falling Yields Provide Some Support, but Demand for Risk Crushed by Stock Market Plunge

The Australian and New Zealand Dollars were underpinned early when U.S. Treasury yields slipped as investors digested reports on producer price inflation and weekly jobless claims.

But nervous global stock markets tumbled on Thursday as the dollar wilted, after a drumbeat of hawkish remarks from Federal Reserve officials made clear that U.S. interest rates could rise as soon as March, putting an end to ultra-easy monetary conditions.

Fed Governor Lael Brainard became the latest and most senior U.S. central banker to signal that rates will rise in March to fight inflation, saying the Fed “has projected several rate hikes over the course of the year”.