Dollar pairs showed increased volatility on the last trading day of the week. The core PCE price index (one of the main inflation indicators tracked by the Federal Reserve) unexpectedly slowed to 4.6%, contrary to forecasts of growth to 4.9% (according to other estimates – up to 4.7%). The overall index showed a more deplorable result, falling to 6.3%. All components of the inflation report came out in the red zone, putting pressure on the greenback. However, it was extremely risky to open trading positions on dollar pairs on Friday. The market will digest not only the above inflation report, but also the comments of Fed Chairman Jerome Powell, who spoke at an economic symposium in the American city of Jackson Hole on Friday. It is also necessary to take into account the so-called "Friday factor", which also makes its own adjustments.
Therefore, it was advisable to look at the main cross-pairs. Among them, we can single out the AUD/NZD pair, which demonstrates a pronounced upward trend for the second consecutive week. However, if we look at the monthly timeframe, we will see that the price has been in the ascending channel since December 2021. If at the end of last year the cross was at 1.0350, then this week it reached the target of 1.1245 (a 6-year price high). And apparently, the 900-point upward marathon is still far from its completion. At least the price dynamics of the last two weeks suggests that the pair is ready to conquer new price peaks, at least in the area of the 13th figure.
It is noteworthy that bullish sentiment for the pair prevails, despite the fact that the central banks of Australia and New Zealand are actively and almost in unison tightening monetary policy. The only difference is that the Reserve Bank of New Zealand is close to the end of the tightening cycle, while the Australian central bank is only in the middle of the road. Looking ahead, it should be emphasized that the voiced thesis is largely controversial and subjective. But it is this factor that pushes the cross-pair up: according to many analysts, the New Zealand central bank has been tightening monetary policy too actively compared to its colleagues, so it can reach the peak of interest rates before other central banks. Within this peculiar paradigm, the market interprets incoming signals of a fundamental nature against the kiwi, but in favor of the aussie.
For example, the latest report on the growth of the Australian labor market turned out to be very ambiguous. The unemployment rate in the country fell to 3.4%. This is the best result since 1974. But at the same time, the indicator of the increase in the number of employed turned out to be in the negative area, for the first time this year. Moreover, the decline occurred due to a decrease in the component of full employment, while part-time employment, on the contrary, increased.
But in the case of the AUD/NZD pair, market participants came to the conclusion that "the glass is half full": Australian Nonfarm did not break the upward trend – traders used corrective downward pullbacks as an excuse to open long positions.
Moreover, the data on the labor market in New Zealand was disappointing: the unemployment rate, although slightly, still increased in the second quarter (to 3.3%) from a record low of 3.2% in the first quarter. Experts expected a further decline to 3.1% (according to other estimates – up to 3.0%). Another alarming signal is the suspension of the growth of the employment indicator: the number of jobs remained unchanged for the quarter.
The RBNZ and the RBA, following the results of the last meetings, announced that they would maintain a hawkish course. But, as mentioned above, the New Zealand central bank is gradually making it clear that the final line is already visible in his field of vision. While the Australian central bank refrains from such statements.
So, RBNZ Governor Adrian Orr, who spoke at the symposium in Jackson Hole on Friday, said that the central bank will hold "approximately two more rounds of interest rate hikes." It is unknown at what pace the central bank plans to increase rates, Orr did not go into details. But at the same time, he focused his attention on the decline in retail sales. According to him, this is a sign that raising rates "is becoming more painful."
The RBA, in turn, made it clear that it will continue to tighten monetary policy, but not at such an aggressive pace as before. The stage of 50-point increases, apparently, has ended. This is evidenced by many signals (the softer rhetoric of the accompanying statement in July, the corresponding messages in the minutes of the July meeting).
In other words, the market is currently confident that the Australian central bank will continue to pursue a policy of tightening, but at the same time it may slow down the rate increase rate. As for the RBNZ, the prospects are more vague here, especially in the face of Orr's recent statements. There are only three meetings of the RBNZ left until the end of the year – it is likely that the central bank will increase the rate to 4.00%, after which it will take a pause, keeping the OCR at this level.
Thus, the prevailing fundamental background contributes to the further growth of the AUD/NZD cross pair. It is advisable to open longs on downward pullbacks. The first target is 1.1245 (a 6-year high, updated this week). The main goal is the psychologically important target of 1.1300.
