Risk-Appetite Reignites as Markets Await US Consumer Sentiment Data, with AUD/NZD Exchange Rate Rising as Markets Marginally Favour Australian Dollar
Markets are in the mood to chase higher yields, ahead of the upcoming preliminary University of Michigan sentiment index for February, boosting the AUD/NZD exchange rate as the Australian Dollar proves marginally more popular than the New Zealand Dollar.
Although the latest consumer sentiment figures from the US could further raise the inflationary outlook and therefore threaten even tighter monetary policy from the Federal Reserve, this course of action is weighing on the US Dollar as well as the global markets, so there has still been room for AUD and NZD to make strong gains elsewhere, leaving them virtually flat against each other.
The Australian Dollar has proven more popular than the New Zealand Dollar thanks to the greater upside potential of the AUD/NZD exchange rate, which is only just rebounding from a seven-month low of 1.07 this week.
The odds of profiting from appreciation in the pairing are therefore stronger than if markets were to buy into the already-firm NZD/AUD pairing.
Australian Dollar to New Zealand Dollar (AUD/NZD) Exchange Rate Unaffected by RBA Governor Lowe’s Cautious Monetary Policy Outlook
Reserve Bank of Australia (RBA) Governor Philip Lowe has proven just as cautious regarding the domestic outlook on monetary policy as he was last week following the latest RBA monetary policy decisions.
Given that is only a few days since Lowe claimed that the Reserve Bank of Australia wasn’t simply going to start hiking interest rates because other major central banks had begun doing so, it is unsurprising that this position hasn’t changed.
Appearing before a Parliamentary committee, the Governor stated that the focus would remain upon lowering the unemployment rate and boosting inflation to around 2.5%.
Until those two goals are met, policymakers will not be pressured into tightening monetary policy.
In his opening statement, Lowe said;
‘As things currently stand, we expect that progress to be steady, but to be only gradual. Given this assessment, the Reserve Bank board does not see a strong case for a near-term adjustment of monetary policy.’
‘Over time, we expect wage growth to pick up as the labor market strengthens further. The pick-up, though, is likely to be gradual. This increase in wage growth and the more general reduction in spare capacity in the economy are expected to contribute to inflation picking up as well. But to continue the theme, this pick-up, too, is expected to be only gradual.’
Although not a cheering development as far as speculators are concerned, the fact that Lowe has already recently expressed these opinions meant that there was nothing in his testimony to cause surprise to markets or necessitate a repricing of the Australian Dollar.
US Consumer Sentiment Data Forecast to Have Little Effect on AUD/NZD Exchange Rate Balance
Because both the Australian Dollar and New Zealand Dollar are high-yield assets that move inversely to the US Dollar, today’s University of Michigan consumer confidence index could see overall risk-appetite weaken, but this is unlikely to change the AUD/NZD exchange rate.
Both currencies would either weaken or strengthen in response to the latest data and the Australian Dollar remains the asset with the highest potential for gains, leaving the actual distance between them unchanged.
With no domestic data scheduled for release for the rest of the session, the AUD/NZD exchange rate could remain largely unchanged.
Sunday may see some distance grow between the two currencies, as the New Zealand performance of services index for January is scheduled for release.
This would give markets more incentive to favour the Australian Dollar over the New Zealand Dollar (if the index prints poorly) or the New Zealand Dollar over the Australian Dollar (if the index strengthens).