AUD/USD and NZD/USD Fundamental Daily Forecast – Direction of U.S. Rates Will Set the Tone

The Australian and New Zealand Dollars finished mixed on Friday with the Aussie posting a marginal gain and the Kiwi closing lower. Gains were limited by better-than-forecast U.S. jobs data which drove up U.S. Treasury yields as the news was strong enough to increase the chances of perhaps three additional Fed rate hikes later this year.

The AUD/USD settled at .7568, up 0.0003 or +0.04% and the NZD/USD finished at .6987, down 0.0017 or -0.24%.

The price action was also fueled by an easing in political concerns over Italy, however, any optimism was overridden by renewed fears over a global trade war.

In economic news, the government reported the U.S. economy added 223,000 jobs in May, beating pre-report estimates of 188,000. The unemployment rate came in better-than-expected at 3.8 percent. The big news was the 0.3 percent rise in average hourly earnings. This portion of the report helped solidify the chances of a June Fed rate hike, and also raised the odds of possibly a fourth rate hike by the Fed this year.

Treasury yields jumped following the report, with the benchmark 10-year yield trading at 2.89 percent and the two-year yield rising to 2.47 percent. This news helped widen the spread between U.S. government bonds and Australian and New Zealand bonds, making the U.S. Dollar a more attractive investment.

Forecast

Volatility is likely to return to the AUD/USD and NZD/USD this week with major clashes expected from investors reacting to hawkish U.S. Federal Reserve monetary policy, the easing of political turmoil in Italy and a potential global trade war.

The AUD/USD and NZD/USD could be pressured by rising U.S. Treasury yields, however, losses could be limited if the Euro continues to rise in reaction to Italy. The impact of a global trade war could produce mixed results.

Essentially, the price action will be determined by the direction of Treasury yields. They received a boost after U.S. average hourly earnings pointed toward increasing inflation which solidified a rate hike in June at the next Fed meeting, while increasing the chances of at least two more rate hikes in September and December.