AUD/USD and NZD/USD Fundamental Daily Forecast – Central Bank Rate Cuts Likely Coming in May

Yesterday’s report drove up expectations for an RBA rate cut later this year. “The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 basis points at its May meeting.”
James Hyerczyk

The Australian and New Zealand Dollars are trading sideways-to-lower on Thursday following a trading session that saw the Aussie plummet 1.25% and Kiwi 1.00%. The selling pressure was fueled by a weaker than expected Australian consumer inflation report that drove up the chances of a near-term interest rate cut by the Reserve Bank of Australia (RBA).

At 07:10 GMT, the AUD/USD is trading .7013, down 0.0001 or 0.00% and the NZD/USD is at .6590, down 0.0001 or -0.01%.

Trading has been limited so far on Thursday due to bank holidays in Australia and New Zealand. Without the major banks and institutions in the market, the Aussie and Kiwi will be exposed to economic data in the U.S. later in the session.

Australian Dollar

Sparking the sell-off in the AUD/USD on Wednesday was a weak consumer inflation report. The consumer price index (CPI) showed that core inflation at 1.4 percent had drifted to its lowest level in at least 16 years. Furthermore, inflation has been stuck below the RBA’s 2-3 percent target band for three years.

In the minutes of its last monetary policy statement, the RBA said it would be “appropriate” to cut rates if unemployment rose and inflation “did not move any higher”.

Yesterday’s report drove up expectations for an RBA rate cut later this year. “The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 basis points at its May meeting,” ANZ economists Hayden Dimes and David Plank wrote in a note to clients. They also called for a second rate cut to take place in August. This would drive the RBA’s benchmark interest rate to 1 percent.

Another analysts, Commonwealth Bank’s Elias Haddad, said market expectations of the RBA cutting rates next month soared to 64 percent. He also said he believes the widely-expected rate cut will happen in June, with a second cut to happen by the end of this year.

“A 25 basis point RBA rate cut in June is fully priced and a second 25 basis point cut is priced by the end of 2019,” he said.

ANZ and Commonwealth join the other two major banks, Westpac and NAB, in predicting two interest rate cuts this year.

New Zealand Dollar

The NZD/USD fell in sympathy with its Australian counterpart on Wednesday after first quarter inflation in Australia fell to its slowest pace in three years.

Earlier in the month, New Zealand inflation came in lower than expected, driving the chances of a rate cut by the Reserve bank of New Zealand in May to 50 percent. After the Australian CPI data was released, traders moved the chances of that rate cut to 66 percent.

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