Australian, New Zealand Dollars Up as Risk Appetite Returns

The Australian and New Zealand dollars stayed close 2-1/2 week highs on Monday as risk assets returned amid expectations policymakers around the globe will take action to cope with slowing economic growth.

The Aussie, often seen as an indicator of global risk appetite, climbed $0.7127 to mark its highest since December 20. The currency was last up by 0.2 percent to $0.7128.

The kiwi rose 0.4 percent to $0.6757, after hitting a 2-1/2 week high of $0.6751 on Friday.

The antipodean currencies received a boost on Friday after Beijing announced a new round of trade negotiations with the Washington, and after China lowered bank reserve requirements, loosening monetary policy to support its economy.

Adding to optimism was the statement of US Federal Reserve Chair Jerome Powell. The Fed Chair said on Friday the central bank is not on a predetermined course of interest rate hikes and that he was aware of the risks and would be patient and flexible in policy decisions this year.

Chief Market Strategist Michael McCarthy stated that the news flow seen since Friday has lifted sentiment and the market certainly liked what Powell said that day.

However, without a preset path, the Fed could put the policy tightening on pause as it did in 2016 when global growth worries resulted in uncertainties about US economic recovery, according to Powell. The central bank has raised rates four times in 2018 including last month.

The Aussie and kiwi experienced losses last week as speculations of a possible recession in the US intensified, prompting some investors to start pricing in a cut in the Fed fund rate in 2019.

Concerns over the China-US trade war also weighed down markets after disappointing manufacturing data in both countries.

The uncertainties left the risk-sensitive Australian dollar at near-decade lows of $0.6715 on Thursday in a session that included a computer-driven flash crash.

The Aussie rebounded the following day and ended last week with a gain of around 1 percent, although analysts continued to express caution.

Currency strategist Steven Dooley stated that the currency’s short-term momentum might be to the topside but the risks that drove the local currency to ten-year lows remain.

In particular, any further slowdown in US or Chinese manufacturing could pressure the Aussie, Dooley said.

Fed Rate Hike Could Weaken the US Dollar

While the Australian and New Zealand dollars benefitted from Friday’s developments, the same cannot be said for their US counterpart.

The US dollar index, a gauge of the greenback’s strength against a basket of six major currencies, fell 0.2 percent to $95.90, having hit an intraday high of $96.16.

Against the yen, the dollar was down 0.2 percent to 108.22.

Even with Friday’s positive US December jobs report, several analysts are seeing the world’s biggest economy losing momentum and more rate hikes is the last thing the US economy needs.

Powell’s remarks about the Fed being prepared to shift the stance of policy propped up investor sentiment and sent US shares climbing on Friday.

The greenback outperformed other currencies in the previous year due to the Fed being the only central bank to raised rates. If the central bank holds rate hikes in 2019, chances of further appreciation for the dollar may only be small, according to analysts.

During the past two weeks, the US 2-year and 10-year Treasury yields took a sharp drop, indicating that bond traders do not expect the Fed lifting rates this year on the increased possibility of an economic slowdown in China.

Still, some analysts see a Fed rate hike in 2019.

Last Friday’s strong US jobs data suggested that recession fears were overblown, said Currency Strategist Philip Wee, who expects the central bank to raised rates twice this year.

Wee added that with the Fed only looking to pause rate hikes, the market is likely to have gotten ahead of itself in pushing at the US 2-year and 10-year bond yields below the Fed Funds Rate last week.

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