AUD/USD and NZD/USD Fundamental Daily Forecast – Pressured by Trade Concerns, Widening Interest Rate Differential

The Australian and New Zealand Dollars tumbled on Monday as investors reacted negatively to the news that China had cancelled its trade meetings with the United States. While not a deal breaker, it did raise concerns over just how hard it is going to be to reach an agreement. The Aussie Dollar is viewed as a proxy of China-related trades and a gauge of broad risk appetite.

The Aussie and Kiwi were also pressured by a widening of the interest rate differentials between the United States and Australia and New Zealand. Speculators have ramped up bets that the spread in yields between U.S. Government bonds and Australia and New Zealand Government bonds, will increase.

Essentially, the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand is driving the price action. The Fed is preparing to raise rates on Wednesday for the third time this year, while the RBA and RBNZ aren’t expected to raise rates until late 2019/early 2020.

Forecast

Sellers are expected to continue to dominate the trade on Tuesday. At 0336 GMT, the AUD/USD is trading .7241, down 0.0010 or -0.15% and the NZD/USD is at .6637, down 0.0008 or -0.12%.

Traders will get the opportunity to react to several U.S. economic reports today, but the primary focus will be on the start of the Fed’s two-day meeting and interest rate decision on Wednesday. Investors will also pore over the Fed’s monetary policy statement and economic projections for clues as the pace and timing of future rate hikes.

Today’s Home Price Index (HPI) is expected to show an increase of 0.2%. The S&P/CS Composite-20 HPI is expected to come in at 6.2%.

The Conference Board’s Consumer Confidence report is expected to come in at 132.2, slightly below the previously reported 133.4. The Richmond Manufacturing Index is forecast at 22, down from 24.

The Federal Open Market Committee’s (FOMC) meeting is due to take place on Tuesday and Wednesday. Fed Chairman Jerome Powell will likely discuss the strengthening economy, competitive labor market and burgeoning inflation at a news conference afterwards.

The Fed is also widely expected to bump interest rates higher by a quarter-point. However, this has already been factored into investor forecasts. The rate hike will push the funds target to 2 percent to 2.25 percent, where it was last more than 10 years ago.

The AUD/USD and the NZD/USD are also expected to be pressured by lower demand for risky assets and rising crude oil prices, which could lead to an economic slowdown.