The Australian and New Zealand Dollars finished higher last week, but buyers had to battle to hold on to early gains. A rally early in the week was triggered by strong demand for risky assets as stock markets rose in response to optimism over the re-opening of the global economy and positive news about a vaccine against coronavirus. Gains were capped, however, be renewed tensions between the United States and China that threatened the global economic recovery.
The Aussie Dollar was also influenced by economic news and comments from Reserve Bank of Australia (RBA) Governor Philip Lowe.
Risk Sentiment Drove the Price Action
The Australian and New Zealand Dollar jumped the first three days of last week on encouraging early-stage data for a potential coronavirus vaccine and on the promise of more U.S. stimulus to lift and economy beaten down by the pandemic. The news drove up demand for higher-yielding currencies as it sent the U.S. benchmark S&P 500 Index to a 10-week high.
The Aussie and Kiwi retreated from highs late in the week as simmering Sino-U.S. tensions weighed on markets struggling to gauge the pace of economic recovery from the corona virus.
President Donald Trump’s rhetoric against China’s plan for a national security law in Hong Kong on Thursday raised concerns over Washington and Beijing reneging on their Phase-1 trade deal.
Aussie Traders Digested Central Bank Comments
Australia is facing an “unprecedented” economic contraction due to the coronavirus pandemic, though massive fiscal and monetary stimulus would help cushion the blow, minutes from the country’s central bank’s last meeting showed last Tuesday, Reuters reported.
The minutes showed board members discussed a range of economic scenarios in their policy deliberations, with the baseline case for gross domestic product to fall by 10% in the first half and 6% for all of 2020.
“An economic contraction of such speed and magnitude would be unprecedented in the 60-year history of Australia’s quarterly national accounts,” the RBA said.
“Members noted that the nature of the contraction and the expected recovery was also unprecedented because they were driven by public health measures, rather than induced by economic or financial factors.’
Despite the earlier than expected reopening of the domestic economy, unemployment was expected to remain elevated through 2021 while inflation was seen undershooting the RBA’s 2-3% medium-term target for the next few years, according to Reuters.
“Given this outlook, the Board would maintain its efforts to support the economy by keeping funding costs low and credit available to households and businesses,” the RBA added.
Last week’s price action is going to be blueprint over the near-term. With the Australian and New Zealand economies opening up, this is going to be a positive for the currencies with additional support coming from surging demand for risky assets.
Gains are going to be limited by signs of a second-wave of virus outbreaks, weaker demand for risky assets or an escalation of tensions between the United States and China. There’s not much anyone can do with the economic data until the virus is contained and the stimulus money starts to circulate through the economy.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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