AUD/USD and NZD/USD Fundamental Daily Forecast – Pressured by Worsening US Inflation Expectations

The Australian and New Zealand Dollars fell sharply on Friday as sellers resumed their downside pressure, following a one-day reprieve. The catalyst behind the weakness was worsening inflation expectations that kept intact worries the Federal Reserve’s aggressive rate hike path could trigger a global recession.

In the last session of a volatile week, the Aussie and Kiwi opened higher, then reversed course after data from the University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gasoline prices moved higher. Retail sales data also indicated resilience among consumers.

On Friday, the AUD/USD settled at .6201, -0.0096 or -1.54% and the NZD/USD closed at .5559, down 0.0080 or -1.44%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) finished at $61.41, down $0.90 or -1.44%.

US Consumers Showing Resilience

U.S. retail sales were unexpectedly flat in September as households cut back on purchases of motor vehicles and other big-ticket items like electronics and appliances amid stubbornly high inflation and rapidly rising interest rates.

But consumers are not rolling over yet, with the report from the Commerce Department on Friday also showing a measure of underlying retail sales rising lost month, thanks to strong wage gains and savings. These so-called core retail sales were also stronger than initially thought in August.

Surprisingly, economists saw no impact on monetary policy from the mixed retail sales report. This is not good news for the Australian and New Zealand Dollars since it likely means the Fed will continue to raise rates aggressively to knock down prices. The tighter the Fed gets, the greater the chances of a recession at some time in the future.

Inflation Expectations Deteriorate

The mixed retail sales weren’t the only story driving the price action on Friday. Perhaps exerting the greatest pressure on the Aussie and Kiwi were the pair of surveys from the University of Michigan.

According to the first survey, consumer sentiment improved further in October. This was somewhat supportive for the U.S. Dollar and a big negative for its Australian and New Zealand counterparts.

The second survey was the most destructive to the Aussie and Kiwi because it showed inflation expectations had deteriorated a little as average national gasoline prices moved back up towards $4 per gallon after falling over the summer.

Short-Term Outlook

We expect AUD/USD and NZD/USD investors to experience more pain as the main driving forces in the market right now are higher interest rates, higher inflation and the Fed having to continue to move its funds target higher.

The overall assessment is that we haven’t seen peak inflation and that’s depressing investor sentiment, which is weighing on demand for higher-risk, commodity-linked currencies like the Australian and New Zealand Dollars.