AUD/USD and NZD/USD Fundamental Forecast – October 20, 2016

The Australian and New Zealand Dollars surged on Wednesday on increased speculation the U.S. Federal Reserve won’t raise interest rates as expected in December. The AUD/USD closed at .7723, up 0.0058 or +0.76%. The NZD/USD finished at .7231, up 0.0042 or +0.58%.

For a third day, the U.S. Dollar spent most of the session in a weak position as Treasury yields ticked lower in reaction to Tuesday’s unimpressive consumer inflation report that suggested underlying inflation was moderating, encouraging investors to trim their bets on an interest rate hike later this year.

Fed fund futures are now implying around a 65 percent chance of a rate hike before the end of the year, down from 70 percent before the CPI data.

The Aussie and the Kiwi also held their ground after a slew of Chinese economic data hit the news early Wednesday. China’s third-quarter gross domestic product matched investor forecasts at 6.7%, while September industrial production came in below expectations.

The Chinese economic data suggests Chinese officials still have solid control over the economy and that the risks of a sharp deterioration are limited. This should help support the Australian and New Zealand Dollars.

In the U.S. on Wednesday, Building Permits came in, up 1.23 million units. This was better than the 1.17 million unit forecast and higher than the previous 1.15 million units. Weaker-than-expected Housing Starts, however, offset the gains in Building Permits, which came in at 1.05 million units, below the 1.18 million units.

Also helping to boost the Australian and New Zealand Dollars were a steep jump in crude oil prices in reaction to an unexpected drawdown in inventory. This helped increase demand for higher-yielding assets.

Forecast

Early Thursday, investors will get the opportunity to react to the latest Australian employment data. The Employment Change is expected to show the economy added 15.2K jobs in September. The unemployment rate is expected to come in at 5.7%, up a tick from August.

Later in the session in Europe, the European Central Bank will release its monetary policy decision. Traders want to know whether ECB President Mario Draghi will give any indications that the central bank will begin tapering its bond purchase program.

On the domestic front, in Australia, the NAB Quarterly Business Confidence report is expected to show the indicator dropped to 2 point in the second quarter, compared to 4 points in the first quarter.

The key reports in the U.S. include the Philly Fed Manufacturing Index, weekly unemployment claims and Existing Home Sales.

The primary focus for AUD/USD an NZD/USD on Thursday will continue to be the direction of U.S. Treasury yields. Both Forex pairs could rally if yields continue to decline. Gains may be limited in the New Zealand Dollar because of a possible rate cut in November by the Reserve Bank of Australia.