AUD/USD and NZD/USD Fundamental Daily Forecast – Early Gains Capped by Fed Governor Warning

The Australian and New Zealand Dollars are edging lower early Monday as U.S. Treasury yields firmed after Friday’s bank holiday and the U.S. Dollar attempted to claw back some of last week’s losses.

Last week, U.S. Treasury yields tumbled across the board, sending the Aussie and Kiwi to multi-month highs, after the October consumer price index report, a key inflation measure, came in weaker than expected, signaling that price increases have possibly peaked.

At 05:00 GMT, the AUD/USD is trading .6676, down 0.0031 or -0.46% and the NZD/USD is at .6089, down 0.0029 or -0.48%. On Friday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $66.38, up $0.92 or +1.41%.

US Rate Hike Expectations Remain Major Driving Force

The latest CPI report gave U.S. investors hope that inflation is now past its peak, lending confidence that the Federal Reserve’s interest rate hikes are slowly working to tame high price increases.

The news essentially confirms the Fed’s own view they need more measured rate hikes now but this shouldn’t stop them from making additional rate rises. The news just affirms that their plan to lower inflation is working.

Cleveland Fed President Loretta Mester reiterated this stance in a speech Thursday when she said there’s more work to do to tame inflation even with a better than expected CPI report.

Aussie, Kiwi Sparked by Easing China COVID Restrictions

In addition to the modest miss on U.S. inflation the Aussie and Kiwi were also supported late last week after China announced it was easing its zero COVID policy. On Friday, China announced it had eased some of its COVID rules and shortened its quarantine period.

NZ Services Sector Jumps Higher in October

Early Monday, a report showed the return of major events combined with the end of COVID restrictions, gave the domestic economy a much needed boost.

The BNZ-Business New Zealand Performance of Services (PSI) Index for October rose 1.5 points from September to 57.4, which was well above the long-term average of 53.6. A reading above 50.0 indicates the service sector is generally expanding.

This report is important because the services sector accounts for the largest part of New Zealand’s economy, around 70 percent of gross domestic product (GDP).

Short-Term Outlook

Last week’s surge in the AUD/USD and NZD/USD were likely fueled by short-covering as traders adjusted positions to the modest change in U.S. consumer inflation and expectations of a slower pace of Fed rate hikes.

Those who believe the Fed may be easing aren’t going to chase the Aussie and Kiwi higher. They are more likely to come in on a pullback into a value area. No one wants to overpay.

However, early Monday, Federal Reserve Governor Christopher Waller warned that the markets were well ahead of themselves on just one inflation report, adding that it would stake a string of soft reports for the bank to take its foot off the brakes.

The AUD/USD and NZD/USD may have bottomed, but it’s going to take more clarity from the Fed next month to really drive a strong rally. After the initial short-covering rally, we could see a rangebound trade until the Fed officially signals a pivot in rate hikes.