AUD/NZD slides amid bank’s hawkish commentary

Investors await CPI and Fed policy signals amid Lunar New Year holiday; AUD/NZD reacts to banks commentary

By Ahmed Azzam | @3zzamous | 9 February 2024

Market open
  • Lunar New Year holiday pauses Asian markets, leading to reduced trading activity

  • Investors await US inflation data amid scarcity of market-moving information

  • China's markets closed; much of Asia to shut early next week

  • AUD/NZD reacts to bank’s call for hike interest rates twice more

  • Asian markets pause amid Lunar New Year holiday

As the Lunar New Year holiday commences, Asian markets remain closed or will conclude trading early, leading to a scarcity of market-moving data. Investors anticipate potential shifts in the US inflation landscape, coinciding with the release of Consumer Price Index (CPI) revisions. China’s markets are closed today, and much of Asia will shut early next week.

The prevailing narrative in global markets centers on recalibrating expectations regarding Federal Reserve rate adjustments. Despite robust auctions this week, US treasuries lack clear direction. Fed officials advocating for patience in monetary policy have tempered expectations of imminent easing measures. However, a glimmer of optimism exists for a rate cut in March, with the Overnight Index Swap (OIS) market pricing in approximately a 20% probability.

Attention now turns to the upcoming CPI revisions, which could significantly influence Fed decision-making. Fed hawk Christopher Waller emphasizes their importance. If CPI revisions surpass expectations, May and June projections may prove overly optimistic. Conversely, a more moderate reading would affirm the Fed’s current stance, reflecting a well-executed soft landing characterized by robust economic growth, moderating inflation, and rising productivity.

AUD/NZD reaction

On Friday, AUD/NZD experiences a slide in response to a bank’s call for the Reserve Bank of New Zealand (RBNZ) to hike interest rates twice more. This reaction appears exaggerated in a market with reduced liquidity. Should AUD/NZD dip to a 1.05 handle, solid support is likely, as observed back in May.

The Australian dollar softens further after RBA’s Bullock suggests that inflation need not return to the midpoint of its 2-3% target before interest rate cuts.

Both RBNZ and RBA are expected to maintain rates on hold for the foreseeable future. New Zealand and Australia continue to navigate economic challenges amidst global uncertainties.