It was a very quiet trading session over the long weekend on the currency markets, with most of the large liquidity providers closed for the Easter Weekend.
The Australian Dollar gained a little ground against the Kiwi, looking to test the 5 month high at 1.09250 for a third time in as many months. The RBNZ has its rate decision on Wednesday April 23rd which should provide forward guidance on this pair as well as against the USD. If Governor Wheeler of the RBNZ does indeed raise rates again in line with consensus to 3% from 2.5 % then we could see the Australian dollar selloff with a retest of the lows of 1.0500 in sight. The AUDNZD has been range bound between these two marks for 5 months as mentioned above, with a dovish tone needed or at least forward guidance of a potential holding of rates going forward to break out of this range.
The Pound verses the Australian dollar continues to favour the upside, following on from last week’s good economic data out of the U.K, and growth upgrade from the IMF, the reclaiming of the 1.80 area is in sight. Bank of England minutes out on Wednesday could clarify whether the Pound truly has put in a short term bottom, or if this two month trend with the Aussie, rising against Sterling, remains intact. If the BOE has said behind closed doors, that as a result of economic activity picking up, they favour rates rises going forward to keep a lid on the economy getting to overheated, then we should see the GBP rally against all of its trading partners, especially as the central banks from the U.S, Australia, and the Euro zone all favour rate stability and easing.
There has been a lot of talk lately, focusing on the different central bank monetary policies and how they affect a currencies direction. In a nut shell, when a central bank raises its interest rates, investors around the world will buy into that particular currency, borrowing a lower interest rate yielding currency to then purchase the currency with the higher interest rate, and then pocket that interest rate differential or yield. This is commonly known as the carry trade.
And the opposite side of that also stands true, if a central bank is on an easing cycle of their main interest rate, investors will sell out of that currency pair as it no longer has an attractive yield, or return.
The Minutes from the BOE on Wednesday, will shed more light on their policy going forward, and remember, the unemployment rate threshold for the BOE considering future hikes is around the 7% level, and last week the unemployment rate came in at 6.9%, so if they even hint at future hikes, we could see a possible influx into the Pound.