Brexit Woes Weigh on Aussie, Kiwi; Yen Pressured by Trade Deal Hope

Domestically, central bank concerns dominated the trade ahead of this week’s Bank of Japan (BOJ) policy decision, the Reserve Bank of New Zealand’s (RBNZ) expected rate hike in November and future loosening by the Reserve Bank of Australia (RBA).
James Hyerczyk
Japanese Yen, Australian Dollar, New Zealand Dollar

The Asia Pacific currencies finished lower last week, pressured by rising U.S. Treasury yields and increased demand for higher risk assets. Fundamentally, investors were rattled by new uncertainties over Brexit, which raised enough concerns to offset any positive developments over U.S.-China trade relations.

Domestically, central bank concerns dominated the trade ahead of this week’s Bank of Japan (BOJ) policy decision, the Reserve Bank of New Zealand’s (RBNZ) expected rate hike in November and future loosening by the Reserve Bank of Australia (RBA).

Brexit, Trade Deal, Demand for Risk

Early in the week, fresh Brexit worries drove safe-haven demand for the Japanese Yen, while pressuring the Aussie and Kiwi. The new concerns were raised after U.K. Prime Minister Boris Johnson was thwarted by a cross-party group of politicians in Parliament who voted to postpone the “meaningful vote” on his new Brexit deal. Later in the week, U.K. lawmakers voted to reject a limited time frame for reviewing legislation related to Britain’s withdrawal from the EU.

It now means that the U.K. is almost certainly not going to leave the U.K. on October 31 – the current deadline, and the EU may provide an extension to prevent a no-deal occurring.

Offsetting the fresh concerns over Brexit was an improvement in investor sentiment around ongoing negotiations between the United States and China.

Australian Dollar

The Australian Dollar started the week higher, but a reversal to the downside on October 22 ignited a three day sell-off.

“The AUD is now likely to be driven more by the domestic economic outlook and relative monetary policy trends and less by the global risk factors such as equities. Our expectations are for the RBA to remain dovish but we also expect a deep cutting cycle from the Fed,” says Vassili Serebriakov, a strategist at UBS, in a research note.

The AUD/USD settled at .6821, down 0.0035 or -0.51%.

New Zealand Dollar

For weeks, the New Zealand Dollar traded higher as investors increased bets on a U.S. Federal Reserve rate cut at the end of October. However, expectations of another rate cut in December likely means the RBNZ will be forced to cut rates in November in order to protect the economy by keeping the Kiwi weak.

The Fed’s next meeting is on October 29-30 and investors have almost priced in a 25-basis point cut in the Fed Funds Rate to between 1.5 percent and 1.75 percent.

The markets have also fully priced in a 25 basis point rate cut to 0.75 percent by the Reserve Bank of New Zealand when its monetary policy committee next meets on November 13 but are pushing out further cuts.

Last week, the NZD/USD settled at .6350, down 0.0036 or -0.56%.

Japanese Yen

According to Reuters, the Bank of Japan is leaning toward keeping monetary policy steady next week as stable markets, a truce in U.S.-China trade talks and robust domestic demand give it room to save it dwindling ammunition to battle the next recession, sources said.

Last week, the USD/JPY settled at 108.674, up 0.266 or +0.25%.

U.S. equities rose last week as investors cheered strong quarterly earnings and apparent progress on the U.S.-China trade front. This helped make the safe-haven Japanese Yen a less-desirable investment.

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