The Australian and New Zealand dollars ended mixed on Friday as investors posted profits and squared positions ahead of the weekend after a tumultuous week. After hitting multi-month lows early in the session, currencies rebounded higher in distance trade as the New Zealand dollar managed to post a slight gain.
AUD / USD stood at 0.7140, down 0.0009 or -0.12% on Friday and NZD / USD closed at 0.6837, up 0.0011 or +0, 16%.
The Aussie and Kiwi hit their 10-month lows on Friday as coronavirus lockdowns undermined their economies and pushed back policy tightening, causing bond yields to drop sharply. The Australian currency lost 3.12% on the week, while the New Zealand currency lost 2.87%.
The spread of the Delta variant at home caused the AUD / USD and NZD / USD to drop sharply for the week, with Sydney extending a strict lockdown until the end of September while New Zealand extended its lockdown national until next week.
With New Zealand on hold, the Reserve Bank (RBNZ) was forced to delay a much-anticipated rate hike earlier in the week. Financial futures prices now have a one in three chance of moving at its October meeting.
Speculators betting on the August rate hike were forced out of their bullish positions when the RBNZ canceled its widely anticipated rate hike. Prices are unlikely to stabilize until the country lifts its nationwide lockdown, as it is likely to inflict damage to GDP and consumer inflation, two key factors that have led to the central bank decision to raise rates right now.
In Australia, the Reserve Bank (RBA) mentioned in the minutes of its monetary policy meeting earlier in the week that it would be willing to inject more stimulus into the economy if necessary. This was bearish news, especially since it looks like more stimulus may be needed due to ongoing lockdowns and a disappointing wage reading argues for an accommodative stance.
This will be the source of short-term volatility, however, as the RBA also said it still plans to cut its bond purchases in September. Something must give. Either the RBA will announce more stimulus measures or it will continue with its reduction plan.
Short term outlook
The direction of the Aussie and Kiwi in the short term will be determined by the movement of the bond market. Rates are plunging in Australia and New Zealand, helping to make their currencies less attractive as the Federal Reserve plans to toughen its policy by cutting back on emergency bond purchases.
Volatility could slow early in the week if major players pull out before the central bankers summit in Jackson Hole, Wyoming, August 26-28. However, it is not in danger of disappearing. Market participants will await information on the Fed’s “tapering talks” as many central bankers aim to move away from the ease policy.