The Australian dollar and New Zealand dollar both tumbled on Tuesday amidst a return to risk aversion, as carry trades throughout the financial markets experienced a sharp reversal.
Economic news was limited, though Australian retail sales did edge slightly higher during the month of July. In a new monthly trend series, the government reported a 0.1 percent gain, matching the June reading. However, this report may now be less reliable since it takes into account a significantly smaller sample size, and will make it a bit more difficult for policy makers to gauge consumer spending, which accounts for approximately 60 percent of economic growth. The biggest piece of event risk by far, though, will be the Reserve Bank of New Zealand’s rate decision, since they are expected to cut rates for the second consecutive month by 25bps to 7.75 percent, according to 14 of the 15 economists polled by Bloomberg News. It is telling, though, that the last economist actually anticipates a 50bps cut. The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. Credit Suisse overnight index swaps are already pricing in nearly 150bps worth of rate cuts within the next 12 months, but if Mr. Bollard mimics his dovish policy statement from July, this sentiment will be exacerbated and the New Zealand dollar will likely plunge. Related article: Forex Carry Trades Drop as DJIA Gives Up Nearly All of Monday's Gains.
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