The Australian and New Zealand Dollars closed higher on Friday after posting dramatic intraday reversals. The Aussie rose after touching a fresh low for the year at .7410, and the Kiwi jumped after plunging more than 1% in the previous session. The rapid turnaround was likely fueled by a drop in the U.S. Dollar on profit-taking ahead of key U.S. inflation data for June next week.
Friday’s rise in U.S. Treasury yields supported riskier assets and currencies, with global stock markets rising and the commodity-linked Australian and New Zealand Dollars catching a bid.
Treasury Yields Rise, U.S. Stocks Hit New Highs; Dollar Weakens
Treasury yields extended their rise on Friday while the three major U.S stock indexes rallied to record closing highs, as markets relaxed a bit from fears of a slowing pace of economic recovery from COVID-19 that dominated trading for much of the week.
Concern about a faltering recovery, driven in part by the spread of the Delta variant of the coronavirus, had reduced risk appetite early in the week and prompted flight-to-safety bond buying, with some betting the reflation trade had stalled.
That action helped push 10-year U.S. government bond yields to a 4-1/2 month low on Thursday. Data released on Friday showed investors through July 6 were reducing short bond positions, which also weighed on yields.
Stocks rose as financials and other economically focused sectors rallied from the selloff sparked by growth worries earlier in the week.
Aussie, Kiwi Under Pressure Throughout the Week
The Aussie and Kiwi were under pressure most of the week as a bout of global risk aversion hit equities and lowered bond yields, while a further lockdown in Sydney challenged the domestic economic outlook.
The Aussie was not helped by news the lockdown in Sydney would be extended to a third week as the outbreak of the Delta variant showed no sign of slowing.
The disruption of the economy only underlined the need for continued stimulus from the Reserve Bank of Australia (RBA), with Governor Philip Lowe again emphasizing that interest rates were not likely to rise until 2024.
Asked why markets were pricing in a hike as early as October next year, Lowe said they might not properly understand the bank’s reaction function.
The RBA was determined to get inflation back into its 2-3% target band and that would take a sustainable lift in wages growth above 3%, something not seen in a decade.
The rallies on Friday were likely triggered by short-covering. If the Aussie and Kiwi are going to move higher for a sustainable period of time, then support bases are going to have to form. Otherwise, traders are likely to remain in the “sell-the-rally” mode.
The market may be anticipating an earlier than expected tightening by the Reserve Bank of New Zealand, however, the Reserve Bank of Australia made it pretty clear at its July 6 policy meeting that it was not going to raise rates until 2024.
The Aussie is likely to remain under pressure because traders feel that with RBA putting its emphasis on wages, it is likely to lag the other central banks in tightening despite the faster-than-expected recovery in activity and employment.