AUD/USD and NZD/USD Fundamental Daily Forecast – Shorts Covering After China Supports Yuan

The Australian and New Zealand Dollars are trading higher early Wednesday. With the U.S. on bank holiday, small speculators are running the show today. Both the Aussie and the Kiwi are also being supported by a potentially supportive statement from the People’s Bank of China.

At 0655 GMT, the AUD/USD is trading .7411, up 0.0024 or +0.32% and the NZD/USD is at .6781, up 0.0028 or +0.41%.

We could also be looking at position-squaring and short-covering in preparation of Friday’s U.S. Non-Farm Payrolls report.

According to Bloomberg, People’s Bank of China Governor Yi Gang said China will “keep the yuan exchange rate basically stable at reasonable and balanced level,” a repetition of standard language that helped stoke speculation that policy makers are prepared to take tougher actions to arrest the plunge in the currency.

Later Tuesday, Sun Guofeng, head of the central bank’s financial research institute, said that the currency’s decline isn’t the result of China deliberately weakening it to gain an advantage over the U.S.

“Recently the yuan’s exchange rate has shown some weakness. This is entirely due to changes in market expectations as external uncertainties rise rather than intended guidance of the central bank,” Sun said in exclusive comments provided to Bloomberg News. “China upholds multilateralism, globalization, free trade and rule-based international guidelines, and will not make the yuan’s exchange rate a tool to cope with trade conflicts.”

Forecast

The PBOC can issue all the potentially friendly statements it wants, but the bottom line is that as long as the divergence between the monetary policies of the U.S. Federal Reserve and the PBOC continues to widen, the yuan will remain under pressure. And this should continue to generate enough tension to keep a lid on the Australian and New Zealand Dollars.

In other words, we don’t think any moves by the PBOC can save the Aussie and Kiwi from further weakness.

And as far as the trade dispute is concerns, China has limited weapons to fight the U.S. so the advantage still remains with the U.S. China’s next move could be to order boycotts of American brands, but it would then risk collateral damage at home. Apparently, Chinese consumers like Coca-Cola, McDonald’s and Disney enough to try to resist any boycott.

So as it stands, we can accept a few short-covering rallies in the AUD/USD and NZD/USD at this time. However, the professionals stand ready to limit gains because the fundamentals are currently stacked against the Aussie and Kiwi.