AUD/USD and NZD/USD Fundamental Daily Forecast – Investors Encouraged by China’s Move to Boost Economy

Stable global equity markets and oversold technical conditions are helping to underpin the Australian and New Zealand Dollars early Tuesday. Buyers could also be showing a delayed response to the injection of fresh stimulus into China’s economy. Despite the possibility of a meaningful short-covering rally, the move isn’t likely to last because of the divergence in the monetary policies between the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand.

At 0500 GMT, the AUD/USD is trading .7079, up 0.0030 or +0.42% and the NZD/USD is at .6454, up 0.0017 or +0.26%.

The recent price action in the AUD/USD suggests investors aren’t paying too much to domestic activity and taking most of its cues from international events. To put it another way, recent reports indicate a strengthening economy, but since the Reserve Bank of Australia continues to hold rates at current historical levels while showing no signs it intends to raise rates anytime soon, investors have been encouraged to shift their attention to offshore events in the United States and China.

Last week, a strengthening U.S. economy, hawkish comments from Fed Chair Jerome Powell and soaring U.S. Treasury yields helped drive the Aussie and the Kiwi to multi-year lows.

So far this week, the price action in the AUD/USD and NZD/USD suggests investors are responding positively to the news that the People’s Bank of China (PBOC) cut the reserve ratio requirement for a range of large commercial banks by 1% Monday in the hope it will encourage lending to businesses.

Forecast

Traders shouldn’t read too much into the developing short-covering rally. It’s not likely to lead to any major change in trend. It is more likely to alleviate some of the downside pressure while setting up another shorting opportunity.

There were no major reports out of New Zealand overnight. In Australia, NAB Business Confidence came in at 6. The previous report was revised upward to 5. Traders were looking for a reading of 5. Business Conditions rose to 15, up from 14 and beat expectations of 9.

According to Alan Oster, NAB Group Chief Economist, “business conditions appear to have stabilized after declining through the middle of 2018.” He also said “despite having eased notably from the highs earlier in the year, they remain well above average, suggesting that the business environment continues to be favorable”. And, “ongoing strength in employment is especially encouraging.”

Oster went on to say that the only concern centers on “lower forward orders”. He said that the mining sector remains the strongest, but “retail is weak and deteriorating”. He further added that “retail has now lagged for some time and is unlikely to turn around anytime soon with the weaker outlook for the consumer and ongoing structural changes in the sector”. Generally speaking, the NAB survey points to “ongoing strength in business activity” into late 2018, but the economy faces “ongoing meek price pressures”.

During the U.S. session, investors will get the opportunity to react to the NFIB Small Business Index which is expected to come in at 108.9. IBD/TIPP Economic Optimism is expected to come in at 54.6, down from 55.7.