Commodity-Linked Aussie, Kiwi Tumble as Money Flows into Safe-Haven Yen

The Australian and New Zealand Dollars were mostly under pressure against the U.S. Dollar, but did show signs of life late in the week after a U.S. labor report showed a slower pace of employment growth. The Japanese Yen, however, rallied to its highest level since January 3 as U.S. Treasury yields plummeted to three year lows as heightened U.S.-China trade tensions fueled expectations of another Federal Reserve rate cut in September.

At mid-week, the narrative supported a stronger U.S. Dollar, but sentiment toward the greenback turned negative on Thursday with the bearish tone strengthening on Friday.

The macro events driving the price action in the U.S. Dollar last week were the Fed rate cut and confusing comments by Fed Chair Jerome Powell on July 31, the announcement of new tariffs against China by the United States on August 1 and the mixed to bearish U.S. Non-Farm Payrolls report on August 2.

When the dust cleared, the CME Group’s FedWatch tool was showing the chance of a September rate cut at 98.1% on Friday afternoon, a large jump from 56.2% a week prior, and 12% after the Fed announcements on July 31.

Australian Dollar

Australian Dollar investors actually received some good news for a change last week, but the new tariffs against China erased their positive impact.

A jump in fuel prices and medical costs helped bolster Australian consumer inflation over the June quarter, easing the pressure on the Reserve Bank to cut interest rates at its August 6 policy meeting.

The Consumer Price Index (CPI) rose 0.6 percent over the quarter to be up 1.6 percent for the year. Core inflation came in at 1.4 percent over the year, the same as the first quarter reading and the weakest reading since the series started in 2003.

Australian Retail Sales came in higher-than-expected at 0.4%, beating the 0.3% forecast

The decent economic data didn’t impress traders, however, as the Australian Dollar continued to tumble in response to an escalation in trade tensions between the U.S. and China. The additional tariffs and the threat of even more to come raised concerns about the impact on the country’s vast manufacturing sector, and potentially China’s demand for raw materials like coal and iron ore.

New Zealand Dollar

The Kiwi was hit on three fronts last week. Firstly, traders expect the Reserve Bank of New Zealand to cut its benchmark interest rate 25-basis points on August 6. Secondly, as a commodity-linked currency, it’s closely aligned with the performance of the global economy, especially China. Thirdly, the New Zealand Dollar is also considered a higher-yielding assets. Demand for higher risk plummeted last week with most investors seeking shelter in the safe-haven Japanese Yen.

On the economic front, ANZ Business Confidence plunged to -44.3 from -38.1. This drop represents an ever-deepening pessimism, particularly in the construction sector. It also has people starting to talk about job security. It will be the RBNZ’s job to stop any weakness in employment in its tracks.

Japanese Yen

The Dollar/Yen finished at an eight month low as safe-haven buying and the pricing in of another Fed rate cut in September made the Japanese Yen a more attractive assets and the U.S. Dollar a less-desirable investment.

At its policy meeting on July 30, the Bank of Japan held off expanding stimulus by committed to doing so “without hesitation” if a global slowdown jeopardizes the country’s economic recovery. The BOJ welcomed the Fed’s rate cut on July 31, saying that the decision would have a positive effect on Japanese and global economies by keeping U.S. growth on a solid footing.

Bank of Japan Deputy Governor Masoyoshi Amamiya said the BOJ, too, could ease policy as an insurance against risks to the economy, though it will not necessarily give markets any advance signal of such action.

Amamiya also said the central bank could widen the band at which it allows long-term interest rates to move around its target, signaling its readiness to accept further falls in bond yields if driven by market forces.