AUD/USD and NZD/USD Fundamental Forecast – October 24, 2016

A stronger U.S. Dollar on Friday helped drive the Australian and New Zealand Dollars lower for the session. The dollar was helped by improving chances for a Fed rate hike before the end of the year, hawkish comments from a FOMC voting member and a better outlook for the U.S. presidential election.

The AUD/USD closed at .7604, down 0.0022 or -0.29%. The NZD/USD ended the session at .7159, down 0.0032 or 0.45%.

The U.S. Dollar rose after the Fed Funds Indicator moved the probability of a December Fed rate hike to 74%. Earlier in the week, it had dropped to 65%. During the week-ending October 14, it finished at 70%. Barring any economic surprises this week, the indicator is expected to trend higher.

The odds of a rate hike at the Fed’s November 1-2 monetary policy meeting are pegged at close to 0.00%.

FOMC Member William Dudley’s comments on October 19 continued to be very supportive for the U.S. Dollar even two days after they were made. Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen, added that a quarter-point hike this year is not rally that big a deal” given the economy is “reasonably close” to the Fed’s goals of 2 percent inflation and maximum sustainable employment.

Clinton’s performance at the last presidential debate early last week helped her solidify her lead in the polls, somewhat lifting some of the uncertainty over the outcome of the November 8 election. This helped underpin the U.S. Dollar also.

The Aussie was primary under pressure last week because of a disappointing employment report. It helped weaken the case for the Reserve Bank of Australia’s decision to end its cycle of interest rate cuts.

The Kiwi lost ground at the end of the week due to the stronger dollar, but still managed to close higher for the week. A surprised increase in consumer inflation triggered a short-covering rally because it reduced the odds of a November rate cut by the Reserve Bank of New Zealand.

Forecast

There are no reports from Australia on Monday, but all eyes will be on Tuesday’s release of the consumer inflation report. It is expected to show inflation rose by 0.5%, unchanged from the previous 0.5% read. This report is important because it could ultimately decide whether the RBA will end this cycle of reducing interest rates. New Zealand is on bank holiday.

Today’s focus will be on the U.S. Dollar and whether its torrid rally will continue. Hawkish FOMC members William Dudley and James Bullard are scheduled to give speeches at 1300 GMT and 1305 GMT respectively. If they continue to deliver reasons for the Fed to hike rates in December then look for pressure on the AUD/USD and NZD/USD.

U.S. Flash Manufacturing PMI will also come out at 1345 GMT. It is expected to come in at 51.6, up slightly from the previous 51.5 read. Traders would like to see an increase, however, more importantly, they would like to see it remain above 50.