AUD/USD and NZD/USD Fundamental Daily Forecast – RBA Hikes Rates as Expected, But Fed Uncertainty Weighs

The Australian and New Zealand Dollars are inching higher on Tuesday as traders try to stabilize prices following yesterday’s dramatic reversal to the downside.

Traders are showing little reaction to the highly telegraphed 25-basis point rate hike by the Reserve Bank of Australia (RBA) and the surprise Australian trade balance deficit.

What’s garnering most of the attention for Aussie and Kiwi traders are fears that the Federal Reserve could hike interest rates for longer.

At 03:45 GMT, the AUD/USD is trading .6721, up 0.0022 or +0.33% and the NZD/USD is at .6326, up 0.0010 or +0.16%. On Monday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $66.23, down $1.08 or -1.6

RBA Raises Rates to 10-Year High, Says More Needed

The Reserve Bank of Australia (RBA) on Tuesday delivered a widely expected interest rate hike at its last policy decision of 2022 and said more hikes are still needed in the future as policymakers seek to rein in inflation.

The RBA lifted its cash rate by 25 basis points to a 10-year peak of 3.1%, the eighth in as many months. Ahead of the December policy meeting, all economists polled by Reuters had expected the RBA to go for another modest 25 basis point hike, its third in a row after a succession of half-point hikes.

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” said Governor Philip Lowe in a statement.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labor market.”

Australia Records Current Account Deficit

Australia’s current account balance decreased by $17.0 billion, resulting in a deficit of $2.3 billion (seasonally adjusted, current prices) in the September quarter 2022, according to the latest figures from the Australian Bureau of Statistics (ABS).

Australia recorded a $2.3 billion current account deficit in the September quarter 2022, following 13 consecutive quarters of a current account surplus. The balance on goods and services decreased by $11.1 billion but remained in a surplus of $31.2 billion, while the net primary income deficit widened by $6.4 billion to $33.2 billion in the September quarter 2022.

Grace Kim, acting head of international statistics at the ABS, said:  “The current account deficit reflected a narrowing but robust trade surplus, which was offset by a record high income deficit in the September quarter.”

Short-Term Outlook

Monday’s price action suggests the Australian and New Zealand Dollars may be forming a short-term top after strong U.S. data sparked fears that the Federal Reserve could hike interest rates for longer.

Data showed U.S. services industry activity unexpectedly picked up in November in the latest sign of underlying economic momentum that could keep the Fed on alert to tighten policy further as its fights high inflation.

The FedWatch Tool indicates a 77.0% chance of a 50 basis point rate hike in December. This is down from 91.0%. This is not the issue for traders.

The main concern is that investors are conflicted on how long the central bank’s interest rate hiking campaign will need to last, especially given the recent data showing the economy remains strong in some areas.