AUD/USD and NZD/USD Fundamental Analysis – Forecast for October 2016

Increased demand for higher yielding currencies helped underpin the Australian and New Zealand Dollars in September. However, hawkish central bank policy allowed the Aussie to outperform the Kiwi which was hampered by a dovish central bank tone. The AUD/USD finished September at .7656, up 0.140 or +1.86% while the NZD/USD gained 0.0031, or +0.43% to finish at .7281.

Buyers came out of the box swinging in September, picking up from a late August bottom at .7490 to drive the AUD/USD to a top on September 8 at .7732. This lead to a huge drop to .7441 on September 13 then a subsequent rally to .7709 on September 29.

Early in the month, the Australian Dollar rose with the other higher-yielding currencies after the Reserve Bank of Australia kept interest rates steady at 1.5 percent and gave no indication that cuts would become necessary in the near future.

Long-time RBA Governor Glenn Stevens retired shortly after the central bank’s announcement so this was his final meeting.

U.S. Fed policy influenced the direction of the Aussie at times during September, first triggering a massive sell-off on September 8 after several Fed officials said they supported a rate hike later in the month. Then fueling a massive rally after it became clear that the Fed would pass on a rate hike at its September meeting.

The Aussie was also supported by the OPEC decision to cut output later in the year, but rejected when questions arose about the financial health of Deutsche Bank at the end of the month.

The NZD/USD was underpinned by investors seeking its attractive yield, but gains were limited after the Reserve Bank of New Zealand left interest rates unchanged at 1.50% on September 21 while strongly suggesting there would be another rate cut before the end of the year in order to help return inflation to target.

Like the Australian Dollar, the New Zealand Dollar was also influenced heavily by risk-on and risk-off trading.

FORECAST

For the most part, the price action and the direction of the Aussie and the Kiwi should be largely influenced in October by investor appetite for risk and demand for higher yields. As you can see from the way these currencies moved in September, this really can’t be predicted, but it is beneficial to know that it exists. There are clues, however, that this is driving the market. The most common clue is higher equity markets.

Early in October the RBA will meet to discuss policy. It is not expected to change interest rates, but may express concerns about the value of the Australian Dollar especially if it is over .7700.

The RBNZ is not expected to meet until November, but towards the end of the month we may see selling pressure emerge, driving the NZD/USD lower in anticipation of an interest rate announcement.