AUD/USD and NZD/USD Fundamental Daily Forecast – End-of-Month Position-Squaring Providing Support

The Australian and New Zealand Dollars are trading mixed early Tuesday. Volume is light and the trade is tentative as most of the major players are on the sidelines ahead of Wednesday’s U.S. GDP report, and a series of domestic reports on Thursday.

At 1139 GMT, the AUD/USD is trading .7345, unchanged. The NZD/USD is at .6707, up 0.0008 or +0.14%.

The trade is also light because traditionally, there is not much action in the financial markets during the last week of August and ahead of the U.S. Labor Day holiday. Europe has essentially been on holiday the whole month of August. Sometimes the low volume extends into the first week in September. The U.S. bank holiday is Monday, September 3.

Most of the trading we are seeing is end of the month position-squaring. Additionally, the moves are short-term in nature. Longer-term, the wide interest rate differential between U.S. Government bonds and Australian and New Zealand bonds is driving the price action. It is also casting a bearish tone on the Forex pairs.

Forecast

The new trade agreement between the U.S. and Mexico is weighing on the U.S. Dollar, helping to underpin the Aussie and Kiwi because many professionals had maintained safe-haven positions in the greenback throughout the ordeal. With concerns over Mexico lifted, U.S. Dollar bulls no longer have to hold on to these hedges.

However, U.S. Dollar bulls are still holding on to long positions because of the on-going trade dispute between the U.S. and China. Therefore, the Aussie and Kiwi are likely to be limited to the upside. Any trade escalation between the two countries will play favorably into the U.S. Dollar as a risk aversion trade. This likely means that the major players will continue to hold on to their short AUD/USD and NZD/USD positions.

The Aussie and Kiwi could get a boost if there is an early settlement of the trade dispute between the U.S. and China, however, this is unlikely since Trump wants to play hardball with China. Furthermore, Trump picked up some political goodwill from the Mexico deal so he may let the dispute extend beyond the November mid-term elections.