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The Australian and New Zealand Dollar were whacked last week for a loss of over 1 percent. The selling was fueled by a number of factors including trade concerns, a dovish central bank, stronger-than-expected U.S. economic data and widening interest rate differentials.
The Aussie and Kiwi were pressured and the U.S. Dollar underpinned on escalating U.S.-Sino trade tensions. Traders are on edge because a public consultation period for proposed U.S. tariffs on an additional $200 billion for Chinese imports ended at 0400 GMT on Friday and the Trump administration can impose those tariffs at any moment, though there is no clear timetable. China is Australia’s largest trading partner.
For the week, the AUD/USD finished at .7106, down 0.0087 or -1.21% and the NZD/USD settled at .6534, down 0.0087 or -1.31%.
Last week, the Reserve Bank of Australia (RBA) kept interest rates at a record low, as it has for the past two years. As expected, RBA Government Philip Lowe left the cash rate at 1.5 percent, a stance he expects would eventually tighten the labor market and spur enough wage growth to speed up inflation.
While the weakness in the Australian Dollar could help speed up the recovery, there is also risk that rising mortgage rates and falling property prices could encourage households to stop spending.
“One continuing source of uncertainty is the outlook for household consumption,” Lowe said in a statement after the decision. “Household income has been growing slowly and debt levels are high,”
Other than the RBA’s gloomy outlook, the economic data wasn’t bad. Australian Retail Sales were flat, missing the forecast, but quarterly GDP was up 0.9%, better than the 0.7% forecast. The previous report was revised upward to 1.1%.
Rising Treasury yields also weighed on the Aussie and Kiwi. The yield on the benchmark two-year Treasury note jumped to its highest level in more than 10 years Friday after the economy added more jobs than expected in August and wages posted their biggest increase of the post-recession period. This helped widen the interest rate differential between U.S. Government bond yields and Australian and New Zealand government debt.
According to the Labor Department, nonfarm payrolls grew by 201,000 in August while average hourly earnings rose 2.9 percent for the month on an annualized basis. On a monthly basis, wages jumped 10 cents or 0.4 percent. Economists had expected payrolls to increase 191,000 and wages to increase 0.2%. The unemployment rate held steady at 3.9%. The news likely offered ammunition to hawkish Federal Reserve officials who are eager to curb burgeoning signs of inflation.