AUD/USD and NZD/USD Fundamental Daily Forecast – After RBNZ Decision, Focus Shifts to U.S. Consumer Inflation

Support for the New Zealand Dollar continued to erode early Thursday following the release of the Reserve Bank of New Zealand’s (RBNZ) interest rate decision and monetary policy statement.

At 0500 GMT, the NZD/USD is trading .6925, down 0.0056 or -0.81%.

The RBNZ left its benchmark cash rate unchanged at its record low of 1.75 percent and said it won’t be moving “for some time to come”. The rate has been unchanged since November 2016.

In its monetary policy statement, the Reserve Bank noted it expected New Zealand’s consumer price inflation to gradually rise to its two percent annual target, and is still forecasting a late 2019 start to OCR increases – although a quarter later.

New RBNZ Governor Adrian Orr surprised no one in delivering his first rates decision and monetary policy statement that called for rates to remain unchanged. He also said the next move could be in either direction.

“We expect to keep the OCR (official cash rate) at this expansionary level for a considerable period of time,” Mr. Orr said in a statement.

“The direction of our next move is equally balanced, up or down. Only time and events will tell.”

U.S. interest rates continued to rise on Wednesday with the 10-year Treasury note breaking above the 3 percent mark for the second time in less than a month. This move may have kept investors on edge while limiting gains in the energy-driven indexes. The two-year note yield also traded at its highest level in nearly a decade.

In economic news, the U.S. Labor Department said producer prices edged up just 0.1 percent in April – the smallest increase since December – capped by a slump in food costs. The department said that the read on the producer price index, which measures inflation pressures before they reach consumers, followed a 0.3 percent rise in March.

Core prices, which exclude volatile energy and food, matched expectations of a 0.2 percent increase in April. Over the past 12 months, wholesale prices are up 2.6 percent while core wholesale prices have risen 2.3 percent, according to Reuters.

Forecast

On Thursday, investors will be paying close attention to the U.S. Core Consumer Price Index which is expected to come in at 0.2 percent for April. A bigger-than-expected change should drive U.S. Treasury yields higher, further widening the spread between U.S. Government Bonds and Australian and New Zealand Bonds. This would make the U.S. Dollar a more attractive investment.

Although the AUD/USD is trading higher early Thursday due to the impact of rising crude oil prices on commodity-linked currencies, gains are likely to be limited by rising U.S. Treasury yields and the divergence between the monetary policies of the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand.