We already know that rising demand for higher-risk assets has been the primary driver of the current three-week surge in the higher-yielding, commodity-linked Australian and New Zealand Dollars. The question that investors will be asking themselves is, will the rally continue this week?
The question is being raised because of Friday’s much better-than-expected U.S. Non-Farm Payrolls report, which triggered a sharp rise in U.S. Treasury yields. It’s possible that a widening of the spread between U.S. yields and Australian and New Zealand yields, will bring some money back into the U.S. Dollar. The move is not likely to change the trend, but it could put a short-term cap on the rally. Anyway, it is something that traders should be watching for since it does give long investors a reasonable excuse to start taking profits.
Another question that investors are asking is, will the U.S. Federal Reserve do or say something at this week’s meeting that could bring an end to the rally or trigger an acceleration to the upside?
Sarah Foster, U.S. Economy Reporter at Bankrate.com says that both the Federal Reserve and the U.S. economy are at an inflection point, and that the Fed’s June meeting will be an opportunity to reassess just how well their actions are working so far and if any additional steps need to be taken.
Federal Reserve policymakers may attempt to address a plethora of questions at this week’s meeting, and their responses could trigger a volatile reaction in the AUD/USD and NZD/USD especially if they fail to endorse the message being sent by the huge rally in the global equity markets that the U.S. economy is on the road to recovery.
Both the Aussie and Kiwi could start to give back a huge chunk of their recent gains if Fed officials throw water on the idea that the global recession will be short-lived and that the U.S. economy has turned an important corner given the surprise jobs data from May.
“The economy is reopening, so there’s a lot of wait and see involved with that,” says Greg McBride, CFA, Bankrate senior economic analyst. “Does the virus have a resurgence? Is the recovery something that’s sustained? To what extent do we see people being called back to work? What’s the level of economic activity relative to what it had been pre-pandemic? These are all data points that are going to get close scrutiny and will factor into the path of both monetary and fiscal policy going forward.”
The Fed is likely to reiterate its pledge to keep interest rates low. However, investor sentiment could take a hit if the Fed releases extremely bleak forecasts about the economy. Investors demanding risky assets seem to be operating with another set of data. Any bearish statements from the Fed could become a reality check for investors betting on a quick recovery from the impact of the coronavirus pandemic.
If the Fed’s forecasts contradict what investors have been pricing into the stock markets and higher risk currency markets, we could see a fresh wave of selling pressure. All I can say at this time because the upside momentum is so strong, is to be careful chasing the Australian and New Zealand Dollars higher. I think at current levels there more risk to the downside than opportunity to the upside.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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