Aussie Pops Nearly 1% as Rate Cut Chances Drop; Kiwi, Yen Driven by Brexit Deal Hopes

The Aussie surged on Thursday and Friday to its highest level since September 18 after RBA Governor Philip Lowe’s latest view that a return to near 3 percent economic growth is “quite probable” by next year and that further interest rate cuts should not be assumed.
James Hyerczyk

The Asia Pacific currencies were active last week with strong gains posted by the Australian and New Zealand Dollars. The price action was primarily driven by domestic economic data and central bank comments. The Japanese Yen inched higher, but for the most part, provided stability during a week that featured low volatility. Brexit and U.S.-China trade relations were the catalysts driving the movement.

Australian Dollar

The Australian Dollar was pressured early last week as the lack of clarity over the partial deal between the U.S. and China dampened the optimism generated when the agreement was first announced on Friday, October 11.

The Reserve Bank of Australia (RBA) minutes of its last monetary policy meeting on October 1 also weighed on the Aussie Dollar as it showed the interest rate cut was sharply debated among board members with fears it could drive up house prices and fail to deliver a boost to the economy.

The minutes showed the contentious move was partly driven by concerns the combination of past reductions and the Morrison government’s income tax cuts had fallen short of expectations.

The minutes also showed the main reasons for the October cut were the bank’s concerns unemployment is not low enough to drive up wages and increased economy-wide inflation.

The Australian Dollar started to turn higher late in the week after a report showed Australian employment posted another solid gain in September while the jobless rate dipped for the first time in seven months as fewer people went looking for work, a tentative hint of a much-needed tightening in the labor market.

The Aussie surged on Thursday and Friday to its highest level since September 18 after RBA Governor Philip Lowe’s latest view that a return to near 3 percent economic growth is “quite probable” by next year and that further interest rate cuts should not be assumed.

Financial markets quickly reduced the chance of a back-to-back 0.25 percentage point interest rate cut in November to just 16 percent from almost 50 percent last week.

The AUD/USD settled last week at .6856, up 0.0063 or +0.92%.

New Zealand Dollar

The New Zealand Dollar was driven to its highest level since September 16 last week in reaction to quarterly consumer inflation data, the hopes that Britain and Europe may agree on a Brexit deal and after China confirmed it continues to work on a preliminary trade deal with the United States. Traders also reassessed the need for additional rate cuts.

“My guess is that the market’s reassessing the chances for another easing form the Reserve Bank after November in light of fairy strong non-tradeables inflation, the pick-up in house prices, and commodity prices which are also holding up quite well,” said Imre Speizer, currency strategist at Westpac.

The Reserve Bank of New Zealand’s official cash rate currently stands at 1 percent and the market is expecting it to cut to 0.75 percent at its monetary policy committee’s next meeting on November 13.

The outcome of the Brexit deal vote over the weekend will be crucial in determining how the New Zealand currency trades next week, Speizer says.

The NZD/USD settled at .6386, up 0.0047 or +0.75%.

Japanese Yen

The Dollar/Yen drifted on both sides of the previous week’s close most of the week before closing marginally lower. The price action primarily reflected the demand for risky assets as major investors sat on the sidelines while waiting for the outcome of Brexit negotiations.

The biggest move for the week was on Tuesday when better-than-expected earnings results drove U.S. stocks sharply higher. This jump in demand for risk made the Japanese Yen a less-desirable asset.

On Thursday, the Dollar/Yen posted a potentially bearish chart pattern following the announcement of a tentative deal between the United Kingdom and the European Commission. A sharp break in U.S. equities late Friday helped turn the Forex pair lower for the week.

The USD/JPY settled the week at 108.408, down 0.019 or -0.02%.

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