Fed Rate Cut Expectations Underpin Aussie, Kiwi; BOJ Could Deliver More Stimulus

Australian and New Zealand Dollars both benefited from expectations of a rate cut by the Fed. The Aussie also picked up strength after the release of the Reserve Bank of Australia Monetary Policy Minutes and steady employment data. The Kiwi was supported by consumer inflation data that met expectations.
James Hyerczyk

Uncertainty over the size of the expected U.S. interest rate cut later this month and domestic data drove the price action in the U.S. Dollar, Australian Dollar, New Zealand Dollar and Japanese Yen last week.

Remarks from high-ranking Federal Reserve officials as well as U.S. economic data helped underpin the U.S. Dollar against a basket of currencies, but worries about the size of the expected rate cut kept a lid on the greenback.

Australian and New Zealand Dollars both benefited from expectations of a rate cut by the Fed. The Aussie also picked up strength after the release of the Reserve Bank of Australia Monetary Policy Minutes and steady employment data. The Kiwi was supported by consumer inflation data that met expectations.

It was a light week for economic data from Japan, but investors were more interested in the relationship between U.S. Government bond yields and Japanese Government bond yields.

U.S. Dollar

On July 16, Federal Reserve Chairman Jerome Powell repeated his pledge to “act as appropriate” to keep the economic expansion going as his fellow central bank policymakers move toward an expected interest rate cut later this month. Traders interpreted this to mean the Fed would cut rates 25-basis points when it meets on July 30-31.

Last week, September U.S. Dollar Index futures settled at 96.840, up 0.435 or +0.45%.

On July 18, New York Federal Reserve President John Williams argued for pre-emptive measures to avoid have to deal with too-low inflation and interest rates. The dollar plunged against a basket of currencies as investors thought his comments bolstered expectations of an aggressive interest rate cut this month.

The dollar turned positive for the week, however, on Friday after the New York Federal Reserve walked back Williams’ dovish comments. Furthermore, the Wall Street Journal reported that the Fed would cut rates by a quarter-percentage point and raise rates later if needed.

In economic news, the Empire State Manufacturing Index, Retail Sales and the Philly Fed Manufacturing Index, all came in better-than-expectations. Building Permits, however, came in lower than expected.

Australian Dollar

The Australian Dollar was primarily underpinned all week by expectations of lower U.S. interest rates. Early in the week, the Aussie dipped a little after minutes from the Reserve Bank of Australia’s (RBA) monetary policy meeting in July showed the central bank was ready to adjust interest rates if required.

“The Board would continue to monitor developments in the labor market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” the minutes showed. “Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target.”

Last week, the AUD/USD settled at .7042, up .0021 or +0.30%.

On July 18, the Australian government reported that employment rose a surprisingly small 500 jobs in June, but all the weakness was in part-time work with full-time jobs rising 21,100. The unemployment rate held at 5.2 percent for a third month running, underlining the challenge the RBA has in reaching its new goal of 4.5 percent.

With the RBA already having cut rates in June and July the jobs data was not considered weak enough to add to the case for another easing in August.

New Zealand Dollar

In New Zealand, consumer prices rose at a faster pace in the second quarter, led by a surge in fuel prices. Consumer prices gained 1.7% from a year earlier, Statistics New Zealand said July 16. That was faster than the 1.5% pace in the first quarter and matched the median forecast of economists. Prices rose 0.6% from three months earlier, also matching expectations.

Last week, the NZD/USD settled at .6761, up 0.0066 or +0.98%.

Japanese Yen

The Dollar/Yen fell last week as investors reacted to a dip in U.S. Treasury yields that tightened the spread between U.S. Government bond yields and Japanese Government bond yields. The catalyst behind the move was the anticipation of a Federal Reserve rate cut later this month.

Last week, the USD/JPY settled at 107.761, down 0.139 or -0.13%.

In economic news, Japanese manufacturers’ business confidence hit a three-year low in July, highlighting the fragility of the export-led economy as external demand slackens in the face of cooling global growth and trade friction, the Reuters Tankan showed.

Japan’s core inflation slowed to its weakest in about two years in June, underlining policymakers’ long battle to boost consumer prices and adding to speculation the Bank of Japan could deliver more stimulus later this month.

Finally, Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank will scrutinize economic developments until the last minute in deciding policy this month, suggesting that whether to stand pat or increase stimulus will be a close call.

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