AUD/USD and NZD/USD Fundamental Daily Forecast – Kiwi Jumps After S&P Upgrades New Zealand’s Outlook

The Australian and New Zealand Dollars are trading higher on Thursday, building upon its strong surge from Wednesday that was fueled by the dovish U.S. Federal Reserve. In addition to the Fed softening its tone on future rate hikes, the Aussie is also being supported by better-than-expected quarterly headline consumer inflation. Additionally, last week, the New Zealand government also said consumer inflation came in better-than-forecast. This reduced the chances of a rate cut later this year.

At 0707 GMT, the AUD/USD is trading .7266, up 0.0018 or +0.24% and the NZD/USD is at .6910, up 0.0013 or +0.18%.

Earlier today, China released disappointing manufacturing PMI data for January. This may be helping to limit the gains in the Aussie since the currency is often used as a proxy for China’s economy.

U.S. Federal Reserve Decisions Drive Up Demand for Commodity-Linked Currencies

The Aussie and Kiwi soared on Wednesday after the Federal Reserve said it will be “patient” when making decisions about future monetary policy. The central bank also removed reference to “further gradual increases” to the federal funds rate in its monetary policy statement. Traders read these moves as signals the Fed may slow the pace of interest rate increases in 2019.

Additionally, Fed policymakers left the benchmark overnight lending rate unchanged between a range of 2.25 percent and 2.5 percent at their January meeting.

Federal Reserve Chairman Jerome Powell set off a volatile reaction in the Aussie and Kiwi when he stated strongly that the central bank has changed its tone regarding future interest rate hikes.

“The case for raising rates has weakened somewhat,” Powell said during a news conference following the central bank’s two-day Federal Open Market Committee meeting.

China Manufacturing PMI Data

The Chinese government said on Thursday its manufacturing activity contracted for the second-straight month in January. This served as another sign that the world’s second-largest economy is slowing down as the country battles domestic issues and its on-going trade dispute with the United States.

The official manufacturing Purchasing Managers’ Index (PMI) for January was 49.5, according to the Chinese National Bureau of Statistics. Although the number was higher than the 49.3 forecast and the 49.4 reported for December, it still came in under 50 which means it is in contraction territory for the second consecutive month.

In other news China’s Services PMI for January came in at 54.7, higher than the 53.8 reported the previous month, according to the official data. This was good news considering that the services sector accounts for more than half of the Chinese economy and this likely softened the blow to the economy from the weak manufacturing PMI number.

Investors shouldn’t read into the better services PMI number, however, since all signs are pointing to a loss of momentum to China’s economy.

Forecast

The focus for AUD/USD and NZD/USD traders now shifts to the U.S.-China trade negotiations that end on Thursday and Friday’s U.S. Non-Farm Payrolls report, which could fuel some volatility.

Breaking News:  S&P Upgrades New Zealand Outlook

In breaking news, “Global ratings agency Standard & Poor’s has affirmed New Zealand’s ‘AA” sovereign credit rating, saying the new government’s plans to lift spending will be a bigger contributor to growth in the future, but are funded through cancelled tax cuts and won’t undermine the outlook. “

“The ratings agency yesterday affirmed the ‘AA’ foreign currency and ‘AA+’ local currency long-term sovereign credit ratings for New Zealand and maintained a stable outlook, saying the nation benefited from its flexible fiscal and monetary policies, resilient economy and stable public policies. S&P anticipates real economic growth of 2.8 percent between 2018 and 2020 driven by cheap credit, a larger population and increased government spending, with consumer spending and business investment likely to stay firm.”

In the absence of major reports from Australia and New Zealand, Aussie and Kiwi traders will continue to monitor the direction of U.S. Treasury yields and demand for risky assets.

Later today, investors will get the opportunity to react to U.S. economic data including the Challenger Job Cuts report, Employment Claims, Chicago PMI and New Home Sales. Also on tap are Weekly Unemployment Claims. They are expected to come in at 215K, up from 199K.