AUD/USD and NZD/USD Fundamental Daily Forecast – Short-Covering Rally Could Weaken if Risk is Off

The Australian and New Zealand Dollars are trading mixed early Monday with the Aussie inching higher and the Kiwi edging lower. The tight trading range and relatively low volume indicates traders are looking for news. In the case of the New Zealand Dollar, it could mean the four day short-covering rally is over after the Forex pair attracted new sellers following a test of a short-term technical retracement zone.

At 07:03 GMT, the AUD/USD is trading .6862, up 0.0006 or +0.09% and the NZD/USD is at .6421, down 0.0007 or -0.10%.

The early price action may be an indication that traders aren’t sure if risk is on or risk is off. Generally speaking, it was a combination of extremely oversold conditions last week and the aggressive shedding of safe-haven assets like Treasurys, gold and the Japanese Yen that fueled the short-covering rally. Take that factor away and you have traders facing the same fundamentals that have been driving the Aussie and Kiwi lower throughout the year.

Technically speaking, the NZD/USD is currently testing a short-term 50% to 61.8% zone at .6429 to .6466. Sellers are coming in on a test of this zone. There is another more important retracement zone at .6530 to .6592, but in order to get there, buyers are going to have to clear out shorts over .6466.

The AUD/USD is rapidly approaching its key retracement zone at .6880 to .6927. Since the main trend is down, sellers are likely to come in on a test of this area.

As far as domestic economic data is concerned, Australia’s Home Loans report came in well-above the forecast at 5.0%. The sharp upturn surprised investors but they knew one was coming because of the Reserve Bank of Australia’s (RBA) back-to-back rate cuts in June and July. Basically, the data means that Australia’s housing market is coming back to life. Does it mean the RBA won’t cut rates again in October? Australian Financial Futures investors don’t think so. They’re still looking for a rate cut.

In New Zealand, Manufacturing Sales were down 0.7% for the quarter. The previous quarter was also revised lower to 0.8%.

The other news events were out of China.

China’s exports unexpectedly fell in August as shipments to the United States slowed sharply. This serves as notice of further weakness in the world’s second-largest economy and underlining a pressing need for more stimulus as the U.S.-China trade war escalates.

On Friday, the People’s Bank of China cut the banks’ reserve requirement for a seventh time since early 2018 to free up more funds for lending, days after a cabinet meeting signaled that more policy loosening may be imminent.

Daily Forecast

The trade balance data is further proof that China’s economy is weakening because of the U.S. tariffs. This could help limit gains in the Aussie and Kiwi on Monday. The move by the PBOC to add more stimulus is potentially supportive, but this will take time to trickle through the economy.

Economic data aside, Aussie and Kiwi traders are probably waiting to see if today will be a risk on or risk off trading session. If risk is on then look for the short-covering to continue although technical resistance areas could limit gains. If risk is off then the AUD/USD and NZD/USD could weaken with the retracement zones attracting new short-sellers.