The U.S. dollar steadied on Tuesday. It remained near the previous session’s five-day low, however. On the other hand, the New Zealand dollar surged forward after hawkish comments from the central bank. Forex markets seem less concerned by the spread of the Delta COVID-19 variant today.
Risk appetite heightened in global markets after the U.S. Food and Drug Administration granted full approval to the coronavirus vaccine developed by Pfizer and BioNTech. This move could accelerate inoculations in the United States.
Investors are concerned that rising COVID-19 infections caused by the highly contagious Delta variant will hinder the recovery from the global health crisis. Despite that, markets have largely looked past such worries thus far this week. Economists are citing thin liquidity as a factor driving swings in growing risk appetite.
The U.S. dollar traded flat at 93.004 against a basket of currencies on Tuesday. It plummeted to a five-day low of 92.947 on Monday, experiencing its largest one-day fall since May.
Against the Japanese yen, the greenback climbed up by 0.1%. The USD/JPY pair changed hands 109.805 on Tuesday. Meanwhile, the euro tumbled down by approximately 0.1% against the U.S. currency, trading at $1.1738.
Currently, forex traders are focusing on the Jackson Hole conference due on Friday. Some investors stated that U.S. Federal Reserve Chair Jerome Powell might give hints about the possible timeline for tapering monetary stimulus on the event.
What do the analysts think?
According to ING strategists, the uncertainty over the spread of the Delta COVID variant and how local authorities will respond to the situation has certainly created a sense of short-termism in Forex markets. They also noted that traders would likely want to wait to hear on this subject from Fed Chair Jerome Powell on Friday before pushing ahead with another major round of dollar-selling and risk-buying.
Furthermore, the governments closely watch COVID case counts, especially in China, where outbreaks appear to be coming under control. New Zealand put its monetary policy on hold last week. The country announced new lockdowns to contain the spread of the Delta variant.
At the same time, French health authorities stated that the number of people hospitalized for coronavirus and those treated in intensive care units reached the highest levels in more than two months. Besides, new data showed on Monday that business activity growth in the United States slowed for a third consecutive month.
How did the Australian dollar fare?
The Australian dollar, which often serves as a liquid proxy for risk appetite, climbed by 0.3% at $0.72305 on Tuesday.
Meanwhile, the New Zealand dollar soared by 0.7%, hitting a 6-day high of $0.69375 over the day. Christian Hawkesby, the Reserve Bank of New Zealand’s assistant governor, stated that policymakers had actively considered a 50-basis point rate hike at the meeting last week, causing the Kiwi’s rally.
Last week, the RBNZ left rates on hold at 0.25%, which is a record low. However, the central bank also noted that it thinks about tightening rates before the year’s end.
On Monday, a senior central bank official announced that the new outbreak of the COVID-19 in New Zealand is not a game-changer yet, adding that there is no pressure to act on monetary policy. In addition, commodity prices strengthened, boosting the Australian and New Zealand dollars earlier in the session.
On Tuesday, the Norwegian dollar climbed up 0.4% against the euro. The pair changed hands at 10.4288, while the Canadian dollar surged forward by 0.2% versus the U.S. dollar.
What about the Chinese Yuan?
The yuan remained steady against the greenback on Tuesday. However, the moves were subdued ahead of a Fed conference.
According to a trader at a foreign bank, there may have been too much unanimity in Forex market expectations earlier. Besides, the dollar index jumped too quickly, and this time its drop was relatively steep. He also added that despite expectations on the market, the agency might not confirm specific timing for tapering at this meeting.
The greenback’s earlier tumble fed into a stronger midpoint rate for the Chinese yuan’s daily trading band on Tuesday, at 6.4805 per dollar, which is its firmest point in a week.
Meanwhile, the spot yuan opened trading at 6.4797 per dollar earlier today. It was changing hands at 6.4817 at midday. At the same time, the offshore yuan lowered to 6.4828 per dollar.
While investors await Fed signals, some have also been contemplating the likelihood of further easing by Chinese monetary authorities to support an uneven economic recovery.
The latest economic data was weaker-than-expected, bolstering expectations in recent weeks that China would plan on more easing measures to cushion a slowdown.
The People’s Bank of China already cut banks’ reserve requirements in July, providing more medium-term loan funding than traders expected, though it has left rates unchanged.
Analysts at Maybank noted that recent statements issued by the PBoC and Politburo suggest that the central bank has probably shifted towards easing bias. As a result, bets on reserve requirement ratio (RRR) cuts remain alive.