AUD/USD and NZD/USD Fundamental Forecast – October 26, 2016

The Australian and New Zealand Dollars pushed higher against the U.S. Dollar on Tuesday, outperforming most of the major foreign currencies. The AUD/USD closed the session at .7645, up 0.0034 or +0.45%. The NZD/USD ended the day at .7163, up 0.0026 or +0.36%.

The Aussie was strong all session as it recovered from last week’s sell-off that was fueled by disappointing Australian jobs data. The move also suggests short-covering or aggressive buying was taking place ahead of Wednesday’s major consumer inflation report.

The Kiwi was weak early in the session as investors increased bets for a possible rate cut by the Reserve Bank of New Zealand at its policy meeting in November. However, the currency reversed to the upside late in the session as the dollar weakened and after a successful test of a short-term support area.

Both the Australian and New Zealand Dollars picked up strength after the U.S. Dollar began to weaken following the release of a disappointing U.S. consumer confidence reading. The Conference Board reported the consumer confidence index at 98.6 in October, falling well-below the forecast of 101.5 and a downwardly revised reading of 103.5 in September.

Forecast

Early Wednesday at 0030 GMT, traders will get the opportunity to react to the latest Australian Consumer Inflation data. The Quarterly CPI is expected to come in at 0.5%, slightly better than the previous 0.4% read. Quarterly Trimmed Mean CPI is forecast to come in at 0.4%, slightly below the previous 0.5% read.

The Australian CPI report is important because it should determine whether the Reserve Bank of Australia keeps open the option to raise interest rates at some time in the future, or decides to adopt a neutral stance.

It is going to take a big deviation from the estimate to encourage the RBA to cut rates once again. The current price action doesn’t seem to suggest investors are looking for a major deviation. RBA Governor Philip Lowe has said he doesn’t plan to move rates further, a weak number could cause investors to question that stance. A weaker core rate of 0.2, for example, would add fuel to the idea of further RBA rate cut expectations and lead to a weaker AUD/USD.

The recently released RBA minutes showed that the central bank would use the updated inflation data for assessing whether to raise rates at their next meeting on November 1. The bank will be watching today’s report closely in determining their further course of action regarding monetary policy.

Significantly weak CPI data in April triggered two rate cuts from the RBA in May and in August. A significantly weaker report today could encourage the central bank to take action as early as December.

Look for the AUD/USD and NZD/USD to rally if the Australian CPI report meets or exceeds expectations. Weaker CPI data combined with last week’s disappointing jobs data could trigger a sharp break to the downside.

Later in the U.S. session, investors will get the chance to react to the Goods Trade Balance, Preliminary Wholesale Inventories, Flash Services PMI and New Home Sales.

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