AUD/USD and NZD/USD Fundamental Daily Forecast – Hawkish Fed Offsets Positive Comments from RBA, RBNZ

The Australian and New Zealand Dollars rose steadily most of the week, seemingly unaffected by the outcome of the U.S. elections, but another hawkish statement from the Fed weakened the Aussie and the Kiwi into Friday’s close. Throughout the week, Aussie and Kiwi traders were primarily focused on domestic events and economic news out of China.

The Aussie was supported last week after the Reserve Bank of Australia kept its interest rate on hold and slightly upped its growth forecast for this year and next. The board of the RBA, governed by Phillip Lowe, voted to maintain the cash rate at 1.50%. The interest rate has been at the current level since August 2016.

“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time,” the bank said in a statement.

Additionally, the RBA raised its forecast for economic growth in 2018 and 2019, which is expected to average around 3.5%. Earlier, the bank expected GDP growth to average 3.25% for this year and next.

The RBA policy makers also formally upgraded their forecasts for GDP growth and unemployment but revisions to its projections of core inflation were relatively small.

New Zealand Dollar

The New Zealand Dollar rose last week, supported by solid employment data. The quarterly Employment Change report rose 1.1%, versus a 0.5% estimate. The previous quarter was revised higher to 0.6%. The Unemployment Rate dropped to 3.9%, better than the 4.4% forecast. The previous quarter was revised lower to 4.4%.

The Reserve Bank of New Zealand left its benchmark interest rate unchanged at 1.75%, but surprised traders by dropping rate cut guidance from its statement. However, the RBNZ also said it expects the economy to pick up, but will continue to keep rates on hold until 2020.

For the week, the AUD/USD settled at .7228, up 0.0030 or +0.41%. The NZD/USD finished at .6738, up 0.0091 or 1.37%.

Forecast

Despite the positive outlooks from the RBA and the RBNZ, Aussie and Kiwi gains are likely to be limited because the divergence in their monetary policies with the Fed continue to favor the U.S. Dollar.

The widening interest rate differential should continue to make the U.S. Dollar a more favorable investment. However, the wildcard remains the trade dispute between the United States and China. If for some reason a new trade deal is struck between the two economic powerhouses, the Aussie and Kiwi would surge to the upside.

Fundamentally, a bearish tone was set by the Fed last week and this tone is likely to continue this week as long as Fed speakers and the economic data continue to support the central bank’s plan to raise rates in December.

On Wednesday, the U.S. will release its latest data on consumer inflation. The CPI is expected to come in at 0.3%. The Core CPI is forecast at 0.2%.

On Thursday, Core Retail Sales are expected to have risen 0.5% and Retail Sales are forecast to have risen 0.6%.

Fed Chairman Jerome Powell will deliver speeches on Wednesday at 2300 GMT and on Friday at 1630 GMT. In last September he made hawkish comments that many blame for setting of the steep decline in early October.

In Australia, on early Wednesday, investors will get the opportunity to react to the latest data on wages. The Wage Price Index, which is another inflation measure, is expected to rise 0.6%. This will match the previous quarter’s gain.

On Thursday, the Australian Employment Change report is expected to show the economy added 20.3K jobs. The Unemployment Rate, however is expected to rise slightly to 5.1% from 5.0%. Due to the recent fluctuations, watch for volatility in the employment change numbers.