The Australian Dollar rose sharply last week after the minutes of the RBA’s July 4 meeting, released on July 18, showed the central bank now estimates the “neutral” official cash rate to be 3.5 percent – a full 200 basis points above where the cash rate is now.
The AUD/USD closed at .7913, up 0.0087 or 1.11%.
Investors interpreted the inclusion of the comment to mean the RBA is now “hawkish”, as it is highly unusual for it to discuss the “neutral” rate at a monetary policy meeting. This interpretation was the catalyst for a massive rally.
However, on Friday, RBA deputy governor Guy Debelle tried to convince hawkish investors that they had misinterpreted the central bank’s move. Speaking at a business lunch in Adelaide, Debelle said: “No significance should be read into the fact the neutral rate was discussed at this particular meeting.”
He also said, “The policy rates in both the U.S. and Canada still remain below that in Australia.” He further added, “Ultimately, in Australia, as is the case elsewhere, policy rates are set at the level assessed to be appropriate to achieve the domestic policy objectives.”
New Zealand Dollar
The New Zealand Dollar recovered from early weakness to post a strong gain for the week. Traders were disappointed by weaker-than-expected quarterly Consumer Inflation data on July 18, but buyers quickly came in after the release of the minutes of the RBA monetary policy meeting.
The NZD/USD settled at .7454, up 0.0108 or +1.47%.
Since there was no major news from New Zealand to fuel the rally, it was attributed to speculation the Reserve Bank of New Zealand would follow the steps of the Reserve Bank of Australia and lower its “neutral” official cash rate, thereby, putting it in a position to raise interest rates sooner than expected.
Forecast
The AUD/USD could feel pressure early in the week from overhang related to Debelle’s dovish comments on Friday. This may also be a drag on the NZD/USD.
There are no reports from China or New Zealand this week so investors will turn all their attention to key reports from Australia and the U.S.
The key reports from the U.S. include Conference Board Consumer Confidence, Core Durable Goods and Advance GDP. The main event will be the U.S. Federal Reserve interest rate decision and monetary policy statement.
The Federal Open Market Committee is widely expected to leave interest rates unchanged at <1.25%. However, investors will be looking for clues in its monetary policy statement as to the timing of the next interest rate hike.
A dovish Fed is likely to send the Aussie and Kiwi higher. A hawkish Fed will be a surprise, but currency traders may not believe them so I’m not sure how the Australian and New Zealand Dollars will react, but I don’t think there will be a major sell-off.