AUD/USD and NZD/USD Fundamental Daily Forecast – Earlier Fed Rate Hike Expectations Weigh on Aussie, Kiwi

The Australian and New Zealand Dollars are hovering near a two-week low early Tuesday, pressured in part by the possibility that Australia’s surge in COVID-19 cases might make the central bank a bit more dovish. A surge in U.S. Treasury yields compounded the weakness by tightening the interest rate differential between U.S. Government bonds and Australian Government bonds.

At 09:09 GMT, the AUD/USD is trading .7213, up 0.0022 or +0.30% and the NZD/USD is at .6791, up 0.0005 or +0.07%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $71.29, down $0.80 or -1.11%.

Australia COVID-19 Cases Surge, Overloading Testing System

Australian COVID-19 cases soared to a pandemic record on Tuesday as the Omicron variant ripped through most of the country, driving up hospitalization rates as the once-formidable testing regime buckled under lengthy wait times and stock shortages.

“We’ve seen a rapid surge in cases to more than 30,000 – the peak of previous waves, for context, in Australia was around 2,000 a day,” said Goldman Sachs economist Andrew Tilton.

The country which for a year and a half used a system of constant testing, contact tracing and lockdowns to squash most outbreaks, clocked 47,799 new infections, up nearly a third on Monday’s number which was also a record.

“The problem at the moment is that the lack of (rapid antigen tests) is completely hampering ‘personal responsibility’ and it is a frustration that is a glaring hole in the current management of COVID,” Chris Moy, vice president of the Australian Medical Association, told ABC Radio on Tuesday, using Morrison’s phase.

US Yields Advance as Mounting COVID Cases Unlikely to Slow 2022 Rate Hikes

U.S. Treasury yields soared on Monday in relatively thin trading, with several markets closed, as investors braced for what could be an earlier-than-expected interest rate hike by the Federal Reserve this year despite the recent jump in COVID-19 cases.

Market participants also said a slew of corporate bond offerings to start the year has pressured Treasury prices, with investors selling them to hedge corporate bond purchases.

Some financial markets are also closed due to holidays in countries such as Britain, Japan, China and Australia, resulting in thin liquidity that may have exacerbated moves in Treasuries.

Yields on U.S. 2-year notes, which are sensitive to rate hike expectations along with 5-year notes, soared to their highest since March 2020. U.S. 30-year, 20-year, 10-year and 5-year yields rose to six-week peaks.

Short-Term Outlook

The price action indicates investors are shifting bets toward a March 2022 Federal Reserve rate hike. This is up from June. The hawkish change is supportive for the U.S. Dollar.

With U.S. inflation still rapidly rising, the Fed will be forced to act aggressively to prevent it from spiraling out of control. A solid U.S. Non-Farm Payrolls report on Friday will solidify the chances of a March rate hike.