The Australian and New Zealand Dollars are trading higher on Thursday. When analyzed alone, this seems like no big deal, but when coupled with selling of the safe-haven Japanese Yen, a rise in U.S. Treasury yields and increased demand for risky assets, then the moves take on added importance.
The markets have been peppered with negative news all week, culminated with the so-called “veiled threat” by China to withhold the exportation of rare earth metals. CNBC left that story up on its webpage all day as if trying to scare investors, but the markets were resilient. There was no escalation in the U.S.-China trade dispute on Wednesday even though the headline writers tried to create one.
It may be just a subtle change, but the price action in the Aussie, Kiwi, Yen, Swiss Franc, Treasurys, stock market and even gold are all indicating that sentiment may be shifting.
While the headline writers may be trying to trigger another wave of selling pressure in stocks and another round of buying of safe-haven assets, keep in mind that all the U.S. and China have to do is announce they are talking about trade again and the negativity will go away quickly.
U.S. Economic News
It was a quiet day in the states on Wednesday. The Richmond Manufacturing Index ticked lower to 5, up from the previously reported 3, but below the 6 estimate.
According to the Richmond Fed, “shipments and new orders had fairly flat reading and the third component, employment remained positive.”
The bank said, “Firms reported growth in spending and positive overall business conditions, and remained optimistic about growth in the coming months.”
The Richmond Fed’s services sector index posted its largest single-month drop since February 2003, plunging to 1 in May from 26 in April. “Firms also reported softening in demand growth and local business conditions,” according to the bank. “However, respondents were optimistic that growth would improve in the next six months.”
There were no major reports from Australia on Thursday and in New Zealand, Building Consents were down 7.9%. Last month, was revised down to -7.4%. The Annual Budget Release was an interesting read, but not a market mover.
At 12:30 GMT, AUD/USD and NZD/USD traders will get the opportunity to react to a number of U.S. economic reports, but the main focus is likely to be on U.S. Gross Domestic Product (GDP).
Today’s reports include the Goods Trade Balance, Preliminary Wholesale Inventories, Weekly Unemployment Claims and Pending Home Sales.
The GDP report is a little tricky to gauge at times because technically, it is stale data. In other words, it represents the past. However, given the escalation in the trade dispute between the United States and China, this report could take on added importance.
Since the data was taken before the latest round of tariffs, which are scheduled to kick in on June 1, a number lower than the 3.2 previous read and especially the 3.1 estimate will take on added importance.
If investors believe that economic growth will worsen after the tariffs are in place then a lower number can only mean the economy is already trending lower.
If the report comes equal to or higher than expected then it will mean the economy has some wiggle room and that perhaps it will take more than the new tariffs to trigger a recession in the future.
Look for heightened volatility with the release of the report and keep in mind that the AUD/USD and NZD/USD price action is indicating an easing of tensions. Don’t be surprised if the U.S. and China announce the trade talks are back on. Both currencies could rally sharply higher if this occurs.
This article was originally posted on FX Empire
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