A number of factors contributed to the Australian and New Zealand Dollars plunge last week including a less-dovish U.S. Federal Reserve, preparation for the U.S. government shutdown, weaker-than-expected domestic data, a drop in the Chinese Yuan and flight-to-safety buying into the Japanese Yen. Trading conditions could slow this week due to low volume because of the Christmas holiday on Tuesday and next week’s New Year’s holiday. Typically, volume is extremely low during this time period which means we could see exaggerated meaningless moves in either direction.
U.S. Federal Reserve Impact
After a steady opening last week, the Aussie and New Zealand Dollar plummeted after the U.S. Federal Reserve raised its benchmark interest rate 25 basis point in a widely expected move. What spooked the markets, however, was the news that the central bank now forecasts two hikes next year, down from three rate hikes previously projected. Traders had priced in as many as 1 or fewer rate hikes in 2019.
Furthermore, the Fed also said it would continue to include in its monetary policy statement that further “gradual” rate hikes would be appropriate. Federal Reserve Chairman Jerome Powell also said the balance sheet reduction program will continue to proceed as planned.
In Australia, the Reserve Bank of Australia monetary policy meeting minutes hinted at a softer tone about the economy when it issued warnings about the housing market and consumption. Some traders went as far as saying the next move on interest rates by the RBA will be lower. Later in the week, the labor market news was mixed with the Employment Change coming in higher than expected at 37.0K and the Unemployment Rate rising slightly to 5.1%.
In New Zealand, quarterly GDP was weaker than expected at 0.3%, well below the 0.6% forecast. This news also prompted investors to increase bets on a Reserve Bank of New Zealand rate hike.
Weaker Chinese Yuan
Last week, the Australian and New Zealand Dollars were also pressured by a drop in the Chinese Yuan, which fell to its lowest level since December 11 against the U.S. Dollar.
U.S. Government Shutdown
The U.S. government shutdown on Saturday. However, it’s not expected to have too much influence on the market unless it remains shutdown beyond January 4.
Stock Market Sell-off and Safe-Haven Buying
The steep plunge in U.S. equity markets also drove investors to seek shelter in the safe-haven Japanese Yen last week. On Friday, traders raced into the U.S. Dollar which contributed to steep losses in both the Aussie and Kiwi.
The AUD/USD and NZD/USD could be rangebound early in the week due to bank holidays on Monday and Tuesday. The U.S. markets are closed only on Tuesday. Nonetheless, if you choose to trade then be prepared for well-below average volume and exaggerated moves in either direction.
Later in the week, the U.S. will release its Conference Board Consumer Confidence report. It is expected to come in at 133.0, lower than the previously reported 135.7.
Due to the bank holidays this week and the next week, economic data may not have much of an influence on the price action until January 4th’s U.S. Non-Farm Payrolls report.
Stock market volatility and the government shutdown are likely to grab most of the headlines this week.
This article was originally posted on FX Empire
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