AUD/USD and NZD/USD Fundamental Daily Forecast – Showing Little Response to PBoC’s Reserve Requirement Cut

The Australian and New Zealand Dollars are inching higher early Monday on short-covering after early session weakness. Volume and volatility appear to be below average with banks in the U.S. and Japan on holiday. U.S. Treasury markets are also closed. This is important because they drove the price action last week.

At 0343 GMT, the AUD/USD is trading .7056, up 0.0006 or +0.10% and the NZD/USD is at .6439, up 0.0001 or +0.01%.

Last week, the Aussie and Kiwi plunged as yields on the benchmark 10-year U.S. Treasury barreled to a seven-year high. This move was partially fueled by a U.S. unemployment rate which fell to its lowest since 1969.

Additionally, U.S. Federal Reserve Chairman Jerome Powell fanned the flames for higher interest rates when he reiterated the central bank’s plan for gradual rate hikes through year end and beyond.

Essentially, it’s the widening of the interest rate spread between U.S. Government bond yields and Australian and New Zealand bond yields that is making the U.S. Dollar a more attractive investment.

The interest rate differential is widening because of the divergence in the monetary policies of the hawkish U.S. Federal Reserve and dovish Reserve Banks of Australia and New Zealand. The Fed raised rates nearly two weeks ago and said it would hike again in December. Furthermore, it also said that it plans at least three more rate hikes in 2019 and at least one more in 2020.

Forecast

With U.S. banks and the Treasury market closed, Aussie and Kiwi traders are likely seeking outside guidance for direction today. This may be coming from China.

On Sunday, China’s central bank moved to support the economy by slashing the level of cash that banks must hold as reserves, injecting a net 750 billion Yuan ($109 billion) into the financial system.

It was the fourth reserve requirement cut this year and comes as the economy fights the drag from an escalating trade dispute with the United States.

The move didn’t come as a complete surprise since analyst were expecting something from the People’s Bank of China after one-week holiday and after U.S. Treasury yields soared last week.

Traders are saying in making the cut, the PBoC hope to limit downward pressure on the Yuan. Additionally, it hopes to increase support for lending.

We may not see the effects from the move by the PBoC today due to the thin-trading conditions. Be careful buying strength and selling weakness because of the low volume. The longer-term trend is still bearish, however, technically oversold conditions could prop up the Aussie and Kiwi for a couple of days especially if U.S. Treasury yields show signs of topping out.