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The Australian and New Zealand Dollar finished higher last week, driven by the weaker U.S. Dollar and carry trade buying by aggressive hedge funds. Dovish remarks from Federal Reserve Chairman Jerome Powell were the catalysts behind most of the strength. With investors pricing in a 100% chance of a 25-basis point rate cut and only a 30% chance of a 50% basis point rate cut.
Last week, the AUD/USD settled at .7021, up 0.0041 or +0.59% and the NZD/USD closed at .6695, up 0.0067 or +1.015.
Powell Signals Rate Cut
On July 10, Fed Chief Jerome Powell, in prepared remarks for Congress, reaffirmed that the central bank is concerned about economic weakness and that it will act as “appropriate” to sustain the recovery – a signal to markets that a rate cut is coming soon.
“It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the US economic outlook,” Powell said in prepared remarks.
Fed Minutes Strengthen Case for Rate Cut
Minutes of the Fed’s June meeting released shortly after Powell’s testimony underscored the Fed chief’s message, strengthening the case even further for a rate cut.
The majority of policy makers noted that the “economy had appeared to have lost some momentum” in recent weeks at their meeting, pointing to weaker business confidence, trade tensions and signs of slowing of global economic growth. They also highlighted worries over risks that might be spurred by federal budget negotiations or a delay in raising the federal debt limit, according to CNN Business.
“Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook,” the minutes of the June meeting said.
Additionally, several policy makers said a rate cut may be needed in the near future because it could “cushion the effects of possible future adverse shocks to the economy.”
Hedge Funds Enter Picture
The U.S. Dollar’s weakness also revived the carry trade, where hedge funds borrow in low-yielding currencies such as the Swiss Franc and the Euro to purchase higher-yielding ones such as the Australian and New Zealand Dollars.
Domestic Data Mixed
In Australia, ANZ Job Advertisements came in better than expected as well as a report on Home Loans. However, investors were disappointed by week NAB Business Confidence and Westpac Consumer Sentiment.
In New Zealand, Business NZ Manufacturing came in at 51.3, higher than the previously reported 50.4.