Demand for both the Australian Dollar and New Zealand Dollar have risen this week as markets become more willing to take risks again, but the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate itself has tumbled due to data and news that has caused a surge in New Zealand Dollar buying.
Since opening this week at the level of 1.0818, AUD/NZD briefly edged higher before plunging during Wednesday’s Asian session. On Thursday morning, AUD/NZD touched on a four month low of 1.0713 before edging higher to trend in the region of 1.0747 as the Australian Dollar rebounded slightly.
Demand for the risky Australian Dollar has been stronger this week, but it has been unable to hold against an even stronger risky New Zealand Dollar.
Both of the relatively risky trade-correlated currencies have seen stronger demand since the end of October, as global stock markets rise and perceived uncertainties in US fiscal policy outlooks cool.
This week, the 2018 US Mid-Term Elections took place – and unlike the 2016 US Presidential election these Mid-Terms went largely as analysts expected they would.
The election ended with the US Democratic Party securing majority power in the House of Congress, while the Republican Party firmed up its control of the Senate.
As a result, of this difference in power, analysts expect the US will enter political gridlock – a situation which could make new legislation difficult to pass into law for now. To markets, this meant less chance of US President Donald Trump introducing new market-friendly fiscal policy.
This has left investors more willing to take risks though, bolstering the strength of the Australian Dollar and New Zealand Dollar.
While the New Zealand Dollar’s own strength knocked the Australian Dollar lower this week, strong economic data from China helped AUD/NZD to recover slightly from multi-month lows on Thursday. This is due to Australia’s strong trade links with China.
The New Zealand Dollar, on the other hand, has been even more appealing this week as major New Zealand data has been far stronger than expected and has helped pressure the Reserve Bank of New Zealand (RBNZ) to dial down its dovish rhetoric.
During Wednesday’s Asian session, New Zealand’s anticipated Q3 job market report was published and came in far better than expected in most major prints.
While New Zealand labour costs didn’t grow as much as expected, the employment change figure surged to 1.1% rather than remaining at 0.5% as expected. The key unemployment rate improved considerably to 3.9% rather than worsening from 4.4% to 4.5% as forecast.
Analysts said the report indicated that New Zealand’s economy would be running closer to capacity and that it should heavily douse the chances of an interest rate cut from the Reserve Bank of New Zealand any time soon.
Sure enough, when the RBNZ held its November policy decision on Thursday the bank took a more neutral tone on monetary policy, and said it would keep a close eye on economic data and risks such as global trade tensions.
As a result of the bank’s tone, bets that the RBNZ could cut interest rates in the near future largely faded. This helped briefly push AUD/NZD to a four month low on Thursday before the ‘Aussie’ recovered slightly.
Still, unless Friday’s Australian data or Reserve Bank of Australia (RBA) statement on monetary policy are particularly impressive, the Australian Dollar to New Zealand Dollar exchange rate is likely to end the week lower.
Demand for the New Zealand Dollar remains sturdy following this week’s domestic news, and a lack of New Zealand data before next week means that sentiment will likely continue.
Friday will see the publication of Australia’s home loans results from September and RBA statement. While they have the potential to be influential, it is unlikely they will cause a surge in Australian Dollar demand.
In fact, if they disappoint the Australian Dollar to New Zealand Dollar exchange rate could end the week near its lowest levels in four months.