Despite Fed Chair Janet Yellen failing to rule out further interest rate hikes over the coming months the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate has been making gains.
Contrary to the hopes of some traders the temporary closure of the Shanghai Composite Index for the observation of the Chinese New Year holiday has failed to curb market volatility this week, with risk aversion having softened both the Australian Dollar (AUD) and New Zealand Dollar (NZD). Although the NAB Business Confidence Index held steady on the month in January the ‘Aussie’ nevertheless trended lower against the ‘Kiwi’, as a slowed acceleration in New Zealand house prices encouraged some measure of confidence. The Australian Dollar was equally weighed down by a fresh slump in commodity prices, with base metals and mining shares dropping sharply.
However, the ‘Aussie’ was shored up on Wednesday by a particularly strong recovery in the Westpac Consumer Confidence Index. Domestic optimism rose from 97.3 to 101.3 in February, suggesting that recent market turbulence has failed to particularly dent confidence within the Australian economy. This stronger showing was followed up by a marked jump in HIA New Home Sales, which revealed a 6.0% increase in the number of homes sold on the month in December. With the local housing market demonstrating greater robustness the appeal of the Australian Dollar equally improved, boosting the antipodean currency across the board.
Investors were further encouraged today by comments from Fed Chair Janet Yellen, who struck a somewhat cautious tone with regards to US monetary policy. While the policymaker failed to rule out the possibility of further interest rate hikes to come over the rest of the year pundits were nevertheless reassured by the acknowledgment of persistent downside risks in the wider global economy. Although a stronger US Dollar (USD) and more Fed monetary tightening do not bode well for the outlook of the commodity-correlated currencies, this prospect has weighed more heavily on the dovish ‘Kiwi’ to keep the AUD/NZD exchange rate on a strong uptrend.
The New Zealand Dollar may achieve a rally on the back of the latest New Zealand Manufacturing PMI later today, however, if the sector continues to demonstrate a solid level of expansion. A stronger showing here could reassure investors concerned by the possibility of the Reserve Bank of New Zealand (RBNZ) opting to cut interest rates in the near future.
Providing markets sustain their current rally the ‘Aussie’ could advance further if the February Consumer Inflation Expectation figure proves bullish, with a more optimistic inflationary outlook likely to discourage the Reserve Bank of Australia (RBA) from adopting an increasingly dovish stance.
At the time of writing, the Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate was trending higher at 1.0670, while the New Zealand Dollar to Australian Dollar (NZD/AUD) pairing was slumped around 0.9369.
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