AUD/USD and NZD/USD Fundamental Daily Forecast – Increasing Global Recession Fears Expected to Weigh

The Australian and New Zealand Dollars edged higher on Friday after reversing earlier losses that brought both currencies on the brink of a technical collapse against the U.S. Dollar. The price action was likely driven by a combination of position-squaring ahead of this week’s U.S. Federal Reserve interest rate decision and a rebound in commodity prices, namely gold and crude oil.

On Friday, the AUD/USD settled at .6722, up 0.0022 or +0.33% and the NZD/USD finished at .5990, up 0.0025 or +0.42%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed at $66.63, up $0.27 or +0.41%.

Trader Response to Volatile Commodity Prices Set the Tone on Friday

Early in the session on Friday, the Australian and New Zealand Dollars were under pressure on Friday as fears of a global downturn crushed commodity prices and inflicted another punishing week for risk sentiment.

Adding to the pressure was a slide in the Chinese Yuan to beyond 7.0 per dollar. Many investors use the Aussie as a proxy for the Yuan given China is Australia’s single biggest export market and a driver of commodity prices.

The Aussie and Kiwi mounted strong turnarounds late Friday to close higher for the session after gold and crude oil turned positive for the day. Both commodities are important to exporting countries like Australian and New Zealand.

Some analysts blamed the reversal in gold prices on safe-haven buying, as global equities tumbled amid increasing worries about the global economy after the World Bank warned of a global recession due to rising interest rates and monetary tightening by central banks.

Meanwhile, supply concerns and hopes of robust demand for oil in the year and next, supported crude oil prices. This assessment was fueled by optimistic outlooks from OPEC and the International Energy Agency.

RBNZ, RBA Rate Hikes Could Heat Up with Fed Expected to Supersize This Week’s Rate Hike

Last month, Reserve Bank of New Zealand (RBNZ) Deputy Governor Christian Hawkesby said that policymakers want rates to be “comfortably above neutral” to help lower core inflation.

At its last meeting on August 17, the RBNZ delivered its seventh straight interest rate hike and signaled a more hawkish tightening path over coming months to rein in stubbornly high inflation. The cash rate is now at 3.0%, a level not seen since September 2015, and rates are forecast to be at 4.0% by early next year.

Meanwhile, Reserve Bank of Australia (RBA) Governor Philip Lowe on Friday reiterated that at some point it would be ready to slow the pace of tightening, but noted the economy was still running strongly.

He now expects the RBA to lift rates by 50 basis points in October to 2.85% and by a further 25 basis points in November before pausing.

In the United States, financial futures market traders expect the Federal Reserve to lift rates on September 21 by 75 or 100 basis points.

Short-Term Outlook

The AUD/USD and NZD/USD could continue to take a beating next week if the Fed raises rates by a full-percentage point. We could, however, see a counter-trend rally if the U.S. central bank chooses the lower end of the range.

Recently, interest rate differentials have been lifting the U.S. Dollar as the market added to wagers of more outsized rate hikes from the Federal Reserve. This sets up the possibility that a 75 basis point rate hike has already been priced into the Aussie and Kiwi. This also indicates that the pressure on the two currencies is likely to come from a 100 basis point rate hike.

RBA, RBNZ to Start Watching for Recession Signs after October Rate Hikes

The hawkish Federal Reserve outlook has stoked speculation the RBA and RBNZ will have to stay aggressive on policy and hike rates by another 50 basis points at their next policy meetings in October.

However, both central banks may be forced to cut rates in 2023 due to slowing growth. The first central bank to hint at a slowdown in rate hikes will be the most vulnerable to a steep sell-off especially if the Fed maintains its hawkish stance, or the U.S. economy continues to look resilient to recession.