The Australian and New Zealand Dollars rebounded from multi-month lows on Friday after weaker-than-expected U.S. manufacturing and services PMI reports raised concerns over the strength of the economy. The news gave short-sellers an excuse to book profits after intensifying worries over the economic impact of the coronavirus fueled a steep sell-off throughout the week.
Last week, the AUD/USD plunged to an 11-year low – its worst level since the global financial crisis – following an unexpected jump in unemployment. On Friday, RBNZ Governor Orr said in a speech that the central bank needs to be prepared for the unanticipated. He was talking about the economic impact of the coronavirus, of course. He also said he is in no hurry to go lower with the cash rate and the RBNZ is in a favorable position with the Official Cash Rate (OCR) at 1%. He further added that record low international interest rates are a new challenge for the central bank.
Aussie, Kiwi Rebound after US PMIs Disappoint
The Australian and New Zealand Dollars posted a dramatic technical closing price reversal bottom on Friday after a pair of reports showed U.S. business activity in both the manufacturing and services sectors stalled in February as companies increasingly concerned about the coronavirus, a survey of purchasing managers showed Friday.
The IHS Markit flash services sector Purchasing Managers’ Index dropped to 49.4 this month, the lowest since October 2013 and signaling that a sector accounting for roughly two-thirds of the U.S. economy was in contraction for the first time since 2016.
Economists polled by Reuters had forecast a reading of 53, down slightly from January’s final reading of 53.4. A reading below 50 indicates contraction.
“The deterioration was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions,” HIS Markit chief business economist Chris Williamson said in the report.
Williamson also noted that companies were cautious about spending because of worries about a broader economic slowdown and uncertainty ahead of U.S. presidential elections in November.
The manufacturing sector barely escaped a slip into contraction, with the flash reading there at 50.8, the lowest since August and down from 51.9 in January. Economists had forecast a reading of 51.5, according to the Reuters poll.
The price action suggests AUD/USD and NZD/USD traders were heavily over-weighted to the downside and needed to rebalance after U.S. Treasury yields plunged following the release of the weaker-than-expected U.S. Manufacturing and Services PMI reports.
Although the Aussie and Kiwi strengthened after the news was released, it was short-covering and not new buying that drove prices higher. Both the Australian and New Zealand economies are likely to struggle as the economic impact of the coronavirus is expected to worsen. Any rallies in the AUD/USD and NZD/USD are likely to be limited by renewed short-selling.
This article was originally posted on FX Empire
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