Yen Rises on Safe-Haven Buying, Surprises Drive Kiwi Higher, Aussie Lower

Risk sentiment over U.S.-China trade relations, central bank activity and economic data drove the price action in the Asia Pacific currencies last week. Uncertainty and mixed headlines over the progress of U.S.-China trade talks sent some investors into the safety of the Japanese Yen.

A surprise policy decision by the Reserve Bank of New Zealand (RBNZ) spiked the Kiwi higher and weak employment data drove up the chances of a rate cut by the Reserve Bank of Australia (RBA), drilling the Aussie Dollar lower.

Japanese Yen

Mixed comments about the status of trade talks between the United States and China encouraged some investors to seek shelter in the safe-haven Japanese Yen although U.S. stock market investors seemed to read the developments as bullish.

Last week, the USD/JPY settled at 108.785, down 0.458 or -0.42%.

Uncertainty over a trade deal wasn’t the only factor making the Japanese Yen an attractive asset, ongoing political turmoil in Hong Kong and weak data from Asia and Europe were also factors.

Hong Kong pro-democracy protesters paralyzed parts of the city for a fourth day on November 14, forcing schools to close and blocking highways, as students build campus barricades and the government dismissed rumors of a curfew. Earlier in the week, protests took a violent turn, heightening an already volatile situation days after a group of pro-democracy lawmakers was arrested in the city.

On the data front, China’s factory output growth slowed more than expected in October, Japan’s economy ground to a standstill in the third quarter and the German economy only narrowly avoided a recession in the third quarter. In Australia, weaker-than-expected employment data sent a signal that the recent rate cuts aren’t helping to revive the economy.

Australian Dollar

The Australian Dollar closed lower last week with most of the loss occurring on November 14  after the Australian 10-year government bond yield slumped to over a 1-week low after the country’s employment report for the month of October created a surprise disappointment among investors, as the jobless rate rose and the employment change slumped.

Last week, the AUD/USD settled at .6821, down 0.0038 or -0.56%.

The 19,000 drop in employment in October was the largest decline in three years and well-below the Bloomberg median forecast of a rise of 15,000. Annual employment growth eased from 2.5 percent in September to 2.0 percent in October, the report added.

“Further, the unemployment rate bounced back from 5.2 percent to 5.3 percent and the only reason why it didn’t rise even more was that the participation rate fell for the second consecutive month. Our view is that the participation rate is more likely to rise in coming months adding further upward pressure on the unemployment rate,” Capital Economics further noted in the report.

The news has rekindled expectations the RBA will have to cut official rates. This drove the Australian Dollar sharply lower.

New Zealand Dollar

The New Zealand Dollar finished the week sharply higher after wholesale interest rates spiked after the Reserve Bank left its official cash rate (OCR) unchanged at 1 percent. Market expectations were weighted towards a rate cut at today’s monetary policy statement.

Last week, the NZD/USD settled at .6402, up 0.0075 or +1.19%.

Analysts described the RBNZ’s decision as a surprise with several indicating the central bank’s new growth outlook still appears too rosy. The financial markets are now pricing in a February or May rate cut. To some, the market reaction showed the positioning ahead of the policy announcement was clearly the wrong way.

The RBNZ, in its statement, said further monetary stimulus would be added if needed. It said employment remained around its maximum sustainable level while inflation remained below the 2 percent target midpoint but within its target range.

“Economic developments since the August statement do not warrant a change to the already stimulatory monetary setting at this time,” it said.