AUD/USD and NZD/USD Fundamental Forecast – October 18, 2016

The Australian and New Zealand Dollars rallied on Monday as the U.S. Dollar backed-off from its highest level since early March. The catalyst behind the move was concern over comments from Friday by Fed Chair Janet Yellen in which she suggested the Federal Reserve may allow inflation to run above target before raising interest rates.

In allowing inflation to run above target the Fed will be essentially delaying its rate hikes, which is not good for the U.S. Dollar. If the Fed believes strongly in this strategy then it may even delay a December rate hike, which has been highly anticipated by traders for about two weeks.

Traders are questioning the timing of Yellen’s comments which may mean the Fed will let inflation run hot before tightening aggressively on the back end of the cycle. Analysts believe this idea has potentially negative economic implications.

Traders decided to reduce long positions in the dollar after the recent rally due to uncertainty over Yellen’s comments. Treasury yields also showed signs of topping out which is also a negative for the Aussie and the Kiwi.

The AUD/USD finished the session at .7627, up 0.0011 or +0.15%. The NZD/USD closed at .7133, down 0.0051, up +0.71%.

Today’s economic data calendar was soft with only a few minor reports. U.S. Industrial Production came in 0.1 percent higher in September, but below the 0.2 percent estimate. The Empire State Manufacturing Index dropped 6.8, well below the +1.1 estimate. The Capacity Utilization Rate was 75.4%, close to the 75.6% estimate. Traders showed limited reaction to this news.

In other news, Federal Reserve Vice Chairman Stanley Fischer on Monday warned of the dangers of low rates in prepared remarks in a speech at the Economic Club of New York. He suggested that low rates can lead to longer and deeper recessions, making the economy more vulnerable.

Fischer added that low rates can also threaten financial stability, although the evidence doesn’t show a heightened state of instability at this time.

FORECAST

On the international front, traders should focus on U.S. Treasury yields. If they start to decline then the U.S. Dollar should start to weaken. The U.S. will also report on consumer inflation on Tuesday.

Domestically, New Zealand will release its latest figures on Consumer Inflation. Traders are looking for a read of 0.0%, down from the previous 0.4%. Low inflation is the key factor influencing the Reserve Bank of New Zealand’s widely anticipated decision to cut rates in November.

Oversold technical conditions and a higher-than-expected inflation number could trigger a rally by the NZD/USD. If the consumer inflation number comes in lower than 0.0%, the New Zealand Dollar could weaken, but losses will be limited if support for the U.S. Dollar continues to erode.

The Reserve Bank of Australia will release the minutes from its last monetary policy committee meeting later today. There should be no surprises. The RBA is likely to talk about concerns over rising home prices. It may mention the value of the currency, but many don’t expect the central bank to list this as a concern. It may also talk about China’s economy and a possible rate hike by the Fed.

Declining Treasury yields in the U.S. are likely to continue to pressure the U.S. Dollar on Tuesday. This should help boost the Australian and New Zealand Dollars. The consumer inflation report could influence the New Zealand Dollar if it comes in higher than expected, since a low figure is expected.

The RBA minutes shouldn’t have too much of an effect on the Australian Dollar unless they express concerns about the economy or specifically comment on the possibility of future rate cuts.

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