Aussie, Kiwi Rise on Central Bank News, but Hawkish Fed Too Much to Overcome

Last week’s price action in the Forex market was driven by a number of events. While the U.S. mid-term elections and Fed’s monetary policy decision took center stage, domestic data and outside events largely influenced the direction of several major currencies.

Overall, the longer-term outlook remained the same. The divergence in the monetary policies of the hawkish Fed and dovish major central banks should continue to underpin the dollar and keep a lid on the other major currencies. However, we could see a number of position adjustments due to oversold conditions or severely undervalued currencies.

Japanese Yen

The Dollar/Yen rose last week as buyers returned to the stock market, dampening the attraction of the Japanese Yen as a safe-haven asset. However, the biggest influence on the Forex pair was the diverging monetary policies of the hawkish U.S. Federal Reserve and the dovish Bank of Japan.

While the Fed remains on track to raise interest rates, the Bank of Japan is widely expected to press on with its ultra-loose monetary policy because of low growth and inflation.

Additionally, the widening interest rate differential between the U.S. and Japanese Government bonds has made the U.S. Dollar a more attractive asset than the Japanese Yen, which is often used as a funding currency for carry trades.

The USD/JPY settled at 113.811, up 0.611 or +0.54%.

Australian Dollar

The Australian Dollar rose steadily all week, seemingly unaffected by the outcome of the U.S. elections and another hawkish statement from the Fed. Aussie traders were primarily focused on domestic events and economic news out of China.

For the week, the AUD/USD settled at .7228, up 0.0030 or +0.41%.

The Aussie was supported last week after the Reserve Bank of Australia kept its interest rate on hold and slightly upped its growth forecast for this year and next. The board of the RBA, governed by Phillip Lowe, voted to maintain the cash rate at 1.50%. The interest rate has been at the current level since August 2016.

“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” the bank said in a statement.

Additionally, the RBA raised its forecast for economic growth in 2018 and 2019, which is expected to average around 3.5%. Earlier, the bank expected GDP growth to average 3.25% for this year and next.

The RBA policy makers also formally upgraded their forecasts for GDP growth and unemployment but revisions to its projections of core inflation were relatively small.

New Zealand Dollar

The New Zealand Dollar rose last week, supported by solid employment data and a surprise tweak to the Reserve Bank of New Zealand’s monetary policy statement.

The quarterly Employment Change report rose 1.1%, versus a 0.5% estimate. The previous quarter was revised higher to 0.6%. The Unemployment Rate dropped to 3.9%, better than the 4.4% forecast. The previous quarter was revised lower to 4.4%.

Last week, the NZD/USD settled at .6738, up 0.0091 or 1.37%.

The Reserve Bank of New Zealand left its benchmark interest rate unchanged at 1.75%, but surprised traders by dropping rate cut guidance from its statement. However, the RBNZ also said it expects the economy to pick up, but will continue to keep rates on hold until 2020.