Although the weakness of the US Dollar (USD) improved commodity currency sentiment on Wednesday, the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate weakened on the back of stronger New Zealand data.
Risk appetite has been on the up this week thanks to the mixed nature of recent US data, as markets continue to weigh up the odds of the Fed opting to raise interest rates imminently. In spite of hawkish commentary from members of the Federal Open Market Committee (FOMC), weaker consumer confidence and manufacturing reports prompted an increase in investor scepticism. This saw both the Australian Dollar (AUD) and New Zealand Dollar (NZD) boosted against rivals, with investors buying back into the higher-yielding currencies.
However, a strong improvement in the NBNZ Business Confidence Index saw the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate weaken on Tuesday. While domestic Building Approvals and Private Sector Credit bettered expectations, the appeal of the ‘Aussie’ remained somewhat muted.
Despite continued support from risk sentiment, the Australian Dollar was dented further on Wednesday as the May Manufacturing PMI weakened markedly from 53.4 to 51.0. This undermined confidence in the robustness of the domestic economy, despite a stronger-than-expected first quarter GDP report. Rather than slipping, as anticipated, growth accelerated at the start of the year from 3.0% to 3.1%, indicating that slowdown pressures had not weighed as heavily on conditions as previously thought. This would seem to reduce the chances of the Reserve Bank of Australia (RBA) choosing to cut interest rates at next week’s policy meeting, although underlying signs of weakness limited the enthusiasm of markets.
Demand for the ‘Kiwi’, meanwhile, turned particularly bullish in response to the first quarter Terms of Trade Index. While export values proved flat on the quarter this was counteracted by an unexpectedly sharp decline in import prices, leading the index to climb markedly from -2.0% to 4.4%. Boding more positively for the outlook of the New Zealand economy, this saw a reduction in calls for the Reserve Bank of New Zealand (RBNZ) to loosen monetary policy at its June rate decision meeting. As Doug Steel, Senior Economist at BNZ, noted:
‘Overall, the softer trade volumes only add to our feeling of caution that we have long expressed regards Q1 GDP (our forecast for that remains at +0.4% awaiting the remaining partial indicators over the coming week). This is not to deny a generally positive growth trend and likely bounce back in Q2, given the lead indicators including yesterday’s business confidence survey.’
The appeal of the ‘Aussie’ could improve later today, however, if the April trade balance data shows a narrowing of the domestic deficit. A smaller trade deficit could bolster confidence in the Australian economy, in spite of continuing uncertainty generated by the election campaign. Nevertheless, as Retail Sales are forecast to have weakened on the month the Australian Dollar could struggle to find substantial support against the strengthened ‘Kiwi’.
Additional volatility is expected for the AUD/NZD exchange rate ahead of the weekend with the release of the latest US Non-Farm Payrolls report, which is considered one of the major influences on Fed policymakers. Weaker levels of employment and wage growth are likely to further discourage the odds of an imminent US rate hike, which could encourage further risk appetite.
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