AUD/USD and NZD/USD Fundamental Daily Forecast – RBA Remains Dovish Even as Economy Heats Up

The Australian and New Zealand Dollars are trading mixed on Tuesday as many of the major players return following the extended U.S. holiday weekend. The Aussie is trading slightly higher after giving back most of its earlier gains, and the Kiwi is drifting lower.

The catalysts behind the price action are firmer U.S. Treasury yields and another dovish announcement from the Reserve Bank of Australia (RBA).

At 08:36 GMT, the AUD/USD is trading .7738, up 0.0006 or +0.07% and the NZD/USD is at .7261, down 0.0012 or -0.17%.

RBA Holds Rates Steady

The RBA left its cash rate unchanged at record lows on Tuesday, while policymakers reiterated its plan to hold policy steady for years even as economic data showed the country’s economic output was better-than-pre-pandemic levels and as housing prices were accelerating to the upside.

The central bank’s policymakers left their benchmark interest rate at 0.1% for a sixth straight meeting, in a decision widely expected by economists in a Reuters poll. Board members cited low inflation and wages as too key reasons behind the decision.

Instead of tracking the Reserve Bank of New Zealand (RBNZ), which last week telegraphed a possible end to its pandemic-era, ultra-loose monetary policy, Governor Philip Lowe justified the need for near-zero rates despite a strong economic recovery by saying “inflation and wage pressures are subdued” and a pick-up in prices is expected to be only “gradual and modest.”

“An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus,” Lowe added.

The RBA also repeated it will not raise interest rates until inflation was “sustainably” within its 2-3% target band. Under its central scenario, underlying inflation is seen below the mid-point of that range through mid-2023.

Aussie GDP Estimates Upgraded

In other news, separate figures showed Australia’s home value index jumped 10.6% in May from a year ago to clock its strongest annual growth rate in almost 11 years. The news prompted analysts to sharply upgrade their forecasts for Australia’s first quarter gross domestic product (GDP) growth to a rapid 1.6% from 1% before the data was released.

First-quarter GDP data is due at 0030 GMT on Wednesday.

Daily Forecast

Despite signs of a strengthening economy, the Aussie continues to run into technical roadblocks that are stopping rallies. Worries over China’s threat to curtail excessive speculation in commodities are also helping to cap gains.

Last week, New Zealand joined Canada and Norway in explicitly outlining an exit from current crisis-mode central bank settings as a global vaccine rollout lifts the prospect of recovery in the world economy. However, the NZD/USD is struggling to regain the momentum from the news that drove prices into its highest level since February 26 last week.

This is probably because the RBNZ’s decision to raise rates is still more than a year away and a lot can happen before that to derail the recovery. Ongoing uncertainties around the pandemic such as vaccinations, border closures and lockdowns could persist into 2022.

Furthermore, the RBNZ is in no hurry to raise rates until inflation and employment targets are met amid an uneven domestic recovery.