AUD/USD and NZD/USD Fundamental Daily Forecast – Short-Covering Rally Being Fueled by Weak ISM US Manufacturing Data

The Australian and New Zealand Dollars are trading higher on Wednesday, continuing to build on the strength of Tuesday’s dramatic technical reversal bottoms that were formed following the release of weaker-than-expected U.S. economic data. Also giving the Aussie a boost is a report showing steady domestic growth. Both the Aussie and the Kiwi were underpinned by stronger services data from China.

At 08:47 GMT, the AUD/USD is trading .6784, up 0.0021 or +0.30% and the NZD/USD is at .6354, up 0.0016 or +0.26%.

First of all, what we’re seeing is short-covering in the AUD/USD and NZD/USD. Secondly, the rallies are not being solely supported by Australian GDP as some headlines suggest. The rally, which began with a closing price reversal bottom on Tuesday, is being fueled by position-adjustments caused by the weaker ISM US Manufacturing PMI report.

Wednesday’s steady Australian GDP was not a policy-changing event since the number came in as expected, but Tuesday’s weaker-than-expected ISM US Manufacturing PMI report is a potential policy changing event because now the Fed has another reason to cut interest rates more aggressively. We already know the RBA is going to cut rates in October so nothing changed there.

Australian Domestic Data

Data released Wednesday showed Australia’s economic rising as expected during the second quarter. Gross domestic product rose 0.5% quarter-on-quarter on a seasonally adjusted basis, and grew 1.4% year-on-year. Both figures came in in line with expectations from their respective Reuters polls.

China Services Improve

The Caixin/Markit Services Purchasing Managers’ Index came in at 52.1 in August, its highest since May. The 50-mark in PMI readings separates growth and contraction. Official data for August released over the weekend showed services sector activity picking up for the first time in five months in August.

US Manufacturing Sector Contracts

On Tuesday, a report showed a gauge of U.S. manufacturing from the Institute for Supply Management showed the sector contracted in August, its first decline since 2016.

The ISM U.S. Manufacturing Purchasing Managers’ Index fell to 49.1% in August, the lowest reading in more than three years. Any reading below 50% signals a contraction.

Daily Forecast

The Australian and New Zealand Dollars are likely to be underpinned on Wednesday as long as investors continue to pressure the U.S. Dollar due to fears of recession with Tuesday’s weak ISM PMI Manufacturing report remaining the catalyst.

The Aussie GDP number was not strong enough to sway the Reserve Bank of Australia from cutting rates in October so I consider the report a non-event. However, fears of a U.S. recession are enough to perhaps convince the Fed to be more aggressive with its rate cuts and this is enough to put pressure on the U.S. Dollar. Aussie and Kiwi short-sellers will be encouraged to adjust their positions to this news and this should support a near-term short-covering rally.