The Australian and New Zealand Dollars finished the week sharply lower against the U.S. Dollar. The price action suggests that investors finally believe the U.S. economy is just too strong and the U.S. Federal Reserve too aggressive for the Aussie and the Kiwi to continue to maintain their attractiveness as a high-yielding currencies.
The AUD/USD settled at .7919, down 0.0189 or -2.33% and the NZD/USD finished the week at .7299, down 0.0056 or 0.76%.
Australia’s inflation rate remained constrained in the December quarter diminishing hopes for a sooner-than-expected rate high by the Reserve Bank of New Zealand. Headline inflation edged up 0.6 percent over the quarter and 1.9 percent over the year, slightly below market expectations.
Underlying inflation, which strips out volatile items and is more closely watched by the Reserve Bank in setting interest rates, rose just 0.4 percent for the quarter.
Over the year, core inflation rose 1.9 percent to remain under the RBA’s target band of 2-3 percent.
U.S. Federal Reserve Interest Rate Decision and Monetary Policy Statement
The U.S. Federal Reserve ended its two-day meeting on Wednesday by announcing it would not raise its benchmark interest rate. However, it indicated that it expects inflation pressures to heat up as the year moves on.
The decision by the Federal Open Market Committee to leave interest rates at 1.25 to 1.50 percent was widely expected. Additionally, according to projections released in December, FOMC officials expect three rate hikes this year so long as there is no significant disruption to market conditions. Recent price action in the Treasury markets, however, suggests that investors believe the Fed is considering a fourth rate hike.
U.S. Non-Farm Payrolls Report
The U.S. Labor Department reported Friday that the U.S. economy added 200,000 jobs in January, beating economist expectations of 180,000 jobs added. The unemployment rate came in as expected at 4.1%, unchanged from the previous month.
In addition to the robust headline news, yields were driven higher by strong evidence of rising wages. Average hourly earnings posted a 0.3 percent gain for the month and an annualized gain of 2.9 percent, the best gain since the early days of the recovery in 2009.
Forecast
Rising Treasury yields should continue to make the U.S. Dollar a more attractive investment this week. This could support the dollar which would put pressure on dollar-denominated commodities.
It was rising commodities and increased appetite for risk that drove the Aussie and Kiwi higher since mid-December. If commodity and stock prices continue to fall this week then this should lead to further long liquidation in the Australian and New Zealand Dollars as well as fresh shorting.