AUD/USD and NZD/USD Fundamental Daily Forecast – Bearish Outlook as Rate Differential Favors US Dollar

The Australian and New Zealand Dollars are edging slightly higher on Thursday following a steep reversal to the downside the previous session. Earlier in the day, the Aussie surged to a high of .6490 before a late session break wiped out all of those gains. Meanwhile, the Kiwi pulled away from a six-week top of .5942.

The early strength was fueled by risk-on sentiment amid speculation the U.S. Federal Reserve would announce it was slowing the pace of its aggressive rate hikes starting in December.

At 05:56 GMT, the AUD/USD is trading .6362, up 0.0012 or +0.19% and the NZD/USD is at .5831, up 0.0011 or +0.19%. On Wednesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $62.98, down $0.34 or -0.54%.

Fed’s Powell Sticks with Hawkish Game Plan

The Fed on Wednesday approved a fourth consecutive three-quarter point interest rate increase, taking its short-term borrowing rate to a target range of 3.75%-4.00%, the highest level since January 2008.

The AUD/USD and NZD/USD rallied initially on the news as bond yields dropped sharply after the Fed’s new statement hinted at a possible policy change. It said the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

However, Fed Chairman Jerome Powell killed the rally when he said in a post-meeting press briefing that the terminal rate will still be higher than anticipated.

“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest of interest rates will be higher than previously expected,” Powell said.

Powell added that the time to slow down tightening may come as soon as the next meeting or the one after that. Powell said it was “premature” to talk about pausing hikes.

“We have a ways to go,” said the chief central banker.

Australian Trade Surplus Hits $12.4 Billion

Australia’s trade surplus hit $12.4 billion in September, driven upwards by gas exports, beating market expectations of about $8.5 billion.

The balance of goods and services lifted by $3.8 billion, with exports soaring by seven percent. Imports remained flat, lifting just 0.4 percent.

Short-Term Outlook

The Australian trade surplus was impressive enough to stop the early session selling on Thursday, but it may not be enough to sustain a long-term rally if the Fed continues to raise rates aggressively.

Furthermore, the yields on 10-year Australian government bonds rose 9 basis points to 3.891%, remaining a hefty 22 basis points under Treasury yields, reflecting wagers that U.S. rates will peak above those in Australia.