The Australian and New Zealand Dollars are trading flat on Tuesday after clawing back earlier losses. Following yesterday’s potentially bearish closing price reversal top, today’s price action suggests investor indecision and impending volatility.
At 04:28 GMT, the AUD/USD is trading .7379, down 0.0003 or -0.04%. The NZD/USD is at .6884, down 0.0003 or -0.05%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $73.34, down $0.15 or -0.20%.
Monday’s trade started out firm as investors continued to bet hawkish moves by the Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) would offset last week’s announced plan by the U.S. Federal Reserve to raise rates at every policy meeting in 2022.
The early price action suggested that Aussie and Kiwi investors had already priced in the Fed news and were shifting their focus on how aggressive their respective central banks would be in combating surging inflation.
However that outlook changed Monday afternoon as the U.S. Dollar strengthened in the wake of comments from U.S. Federal Reserve Chair Jerome Powell that opened the door for the central bank to take a more aggressive monetary policy path.
The news shocked bullish Aussie and Kiwi traders enough to encourage a number of weak longs to book profits, forming a closing price reversal top and perhaps setting the groundwork for a short-term pullback.
Hawkish RBA, RBNZ Expectations
Ahead of Monday’s opening, futures traders had further narrowed the odds on RBA raising its 0.1% cash rate by June, following a very strong jobs report out on Thursday. Futures now imply rates will be around 1.40% by the end of the year, compared to 0.8% back in January.
The RBA’s next policy meeting is on April 5 and there is some speculation it may drop a reference to being “patient” on rate hikes given the tightening labor market and accelerating inflation at home.
The RBNZ has already raised interest rates three times since October. Last week’s report showing a rebound in GDP in Q4 was above the central bank’s forecast. This likely means the bank will remain on its hiking path.
Short-Term Outlook
The initial response to Powell’s hawkish comments was bearish for the AUD/USD and NZD/USD. Over the short-run, however, we’re just going to have to wait to see how bullish traders respond to the news.
The U.S. Dollar could continue to strengthen against the Aussie and Kiwi in the wake of comments from Powell that opened the door for the Fed to take a more aggressive monetary policy path. But we believe the weakness in the AUD/USD and NZD/USD will be short-lived until traders price in the news.