The Australian Dollar soared last week to its highest level since April 2016 and closed in a position to continue the move this week. The widening of the spread between Australian and U.S. government bonds was the catalyst behind the rally. Falling U.S. Treasury yields relative to the high Australian bond yield made the Australian Dollar a more attractive investment.
Dovish comments from Fed Chair Janet Yellen also provided firepower for the rally as well as stronger-than-expected Chinese trade data and disappointing U.S. economic data.
The AUD/USD settled the week at .7825, up 0.0225 or +2.96%.
The New Zealand Dollar also rose in response to falling U.S. Treasury yields along with speculation the Reserve Bank of New Zealand may be more inclined to hike interest rates in the face of price appreciation and hawkish talk from other central banks.
The NZD/USD finished the week at .7345, up 0.0065 or +0.90%.
Fed Chair Yellen helped bolster the Aussie and the Kiwi early in the week during her testimony before the Senate Banking Committee when she raised a red flag on inflation. For months, prior to making the dovish remark, Yellen had been saying the dip in inflation is probably transitory. However, last week she acknowledged that it might not be transitory factors softening inflation.
The Australian and New Zealand Dollars also rose after China reported better-than-expected trade figures for the month of June. The rise in exports and imports reflected resilience in the world’s second-largest economy amid Beijing’s effort to reduce debt and boding well for next week’s report on overall growth. Australia and New Zealand are major trading partners with China.
Finally, the AUD/USD and NZD/USD extended their rallies on Friday after U.S. consumer inflation came in unchanged, lower than the forecast and retail sales also came in lower for a second month. This news raised doubts over whether the U.S. economy is strong enough to handle another Fed rate hike later this year. It also lowered the chances of a Fed rate hike in December to about 50%.
Forecast
This week’s economic reports are on the light side in the U.S. with building permits the only major data to be released. However, we could see volatility from the get-go on Monday with the release of GDP and Industrial Production data from China. GDP is expected to drop lightly to 6.8%. Industrial Production is expected to be steady at 6.5%. A bad GDP report could erase some of the momentum in the Aussie and Kiwi that was attributed to last week’s better-than-expected Chinese trade balance data.