Currency Relief

Australian and New Zealand Dollars Rally as US Debt Ceiling Deal Eases Market Uncertainty

SYDNEY: On Monday, the American president Joe Biden and congressional Republican Kevin McCarthy reached an agreement to suspend the U.S. debt ceiling, relieving a significant source of uncertainty for global markets and giving the Australian and New Zealand dollars some respite.

The Australian dollar increased by 0.2% to $0.6528 this week after falling by 2% the previous week and reaching a six-month low of $0.6490. It currently encounters resistance at the $0.6595 10-day moving average. The New Zealand dollar, meanwhile, was 0.1% higher at $0.6052 after recovering from a 3.6% decline the previous week that sent it to a half-year low of $0.6034. This decrease was influenced by the Reserve Bank of New Zealand’s dovish stance, which surprised the markets by saying it was done raising interest rates. The 200-day moving average of $0.6153 is currently the level of resistance for the kiwi.

Following weeks of protracted negotiations, President Biden and congressional Republican McCarthy came to an agreement late on Saturday to prevent an unstable economic default. The $31.4 trillion debt ceiling is postponed by the agreement until 2025. However, the accord still needs to be approved by the closely split Congress.

The debt ceiling agreement’s relief and Monday’s increase in copper and iron ore prices have helped the Australian dollar stabilize above the 65-cent level. The currency is projected to be affected by worries about China’s economic recovery, projections for persistently increasing U.S. interest rates, and weak local statistics.

Senior currency analyst at the Commonwealth Bank of Australia, Joseph Capurso, gave his opinion, saying that the USD was likely to stabilise early this week after rising by 3% during the previous three weeks. However, it can be a tumultuous week. His remarks emphasize the market’s ambiguity and the possibility of rising volatility in the days to come.

The Federal Reserve’s favorite inflation gauge, the personal consumption expenditures (PCE) price index, outperformed forecasts on Friday, pointing to a clear increasing trend. Markets are currently leaning towards a quarter-point interest rate increase by the Federal Reserve next month, with expectations that rates will stay at that level throughout the year. This is combined with strong U.S. consumer spending data.

In contrast, the Reserve Bank of Australia is anticipated to leave interest rates unchanged for the following month, barring an unforeseen surprise from this week’s monthly inflation estimate. Consumer inflation is expected to have stayed unchanged in April at 6.3%, according to economists, adding to a string of dismal economic data during the previous month.

However, there is a chance of another rate hike in the second half of the year if inflationary pressures and wage growth are stronger than anticipated. The cash rate would increase to 4.1% with such a change. Rates are anticipated to stay there until the end of the year, according to futures markets.

In conclusion, the suspension of the U.S. debt ceiling has given the Australian and New Zealand dollars some short-term comfort. But a number of factors, such as China’s economic recovery, changes in U.S. interest rates, and domestic economic indicators, continue to put pressure on the currencies. Investors and traders should keep a careful eye on market movements and use prudence in the event of future turbulence.

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