Following speculation that policymakers might be prompted to cut interest rates, in response to recent market volatility, the Reserve Bank of Australia (RBA) opted to make no change to monetary policy at its March meeting.
A stronger Australian Manufacturing PMI helped to set the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate on a strong uptrend at the start of the week, as the sector continued to expand from 51.5 to 53.5 in February. This offered some measure of reassurance as to the health of the domestic economy, boosting hopes that the Reserve Bank of Australia (RBA) would remain uninclined to loosen monetary policy at this juncture.
Meanwhile, New Zealand’s fourth quarter Terms of Trade Index demonstrated persistent weakness, failing to improve as pundits had expected to clock in at -2.0% rather than the anticipated 0.0%. As the New Zealand economy continues to struggle against negative global headwinds the likelihood of further Reserve Bank of New Zealand (RBNZ) easing has continued to grow, denting the appeal of the ‘Kiwi’ (NZD).
Although the latest Australian Current Account Balance proved worse than expected this failed to particularly weigh on the ‘Aussie’ (AUD), being overshadowed by the RBA’s latest rate decision. Policymakers ultimately opted to leave interest rates unchanged, but did express some concerns over the outlook of the economy and weaker inflationary pressure in particular. Suggesting a more dovish bias this seems to indicate that the RBA could be on track to cut rates in the near future.
Despite the latest Chinese Manufacturing PMI showing a continued contraction markets remained in a more bullish mood during Tuesday’s European session. Traders are also optimistic that the People’s Bank of China (PBoC) will be prompted to enact further stimulus measures in response to this persistent weakness, encouraging a rise in risk appetite. Nevertheless, the New Zealand Dollar has remained largely out of favour, in spite of the latest GlobalDairyTrade auction showing the first uptick in prices of 2016.
Later today the fourth quarter Australian GDP data is expected to shore up the AUD/NZD currency pairing further, as pundits anticipate a modest uptick in growth from 2.5% to 2.6% on the year. Although inflation remains the key concern for the RBA any signs of continued strength within the wider economy are likely to increase demand for the ‘Aussie’.
However, if the February Service PMI remains firmly within contraction territory the Australian Dollar may be hard pressed to hold onto any gains, suggesting that the domestic economy is struggling to rebalance away from a reliance on the mining industry.
At the time of writing, the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate was trending higher at 1.0820, while the New Zealand Dollar to Australian Dollar (NZD/AUD) pairing was slumped in the region of 0.9236.
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