AUD/USD and NZD/USD Fundamental Daily Forecast – Strong NZ Employment Data Prompts Call for RBNZ Rate Hike

The Australian and New Zealand Dollars are edging higher early Wednesday as traders position themselves ahead of today’s release of key monetary policy decisions from the U.S. Federal Reserve at 18:00 GMT.

The Aussie move is likely being fueled by profit-taking after a steep sell-off on Tuesday, following the release of a dovish monetary policy statement by the Reserve Bank of Australia (RBA). The Kiwi also sold-off hard in response to the move by the Aussie, but today’s early strength is likely being generated by better-than-expected New Zealand employment data.

At 01:57 GMT, the AUD/USD is trading .7435, up 0.0007 or +0.09% and the NZD/USD is at .7123, up 0.0013 or +0.18%.

New Zealand Central Bank Flags Inflation Risks, Financial System Sound

New Zealand’s central bank warned on Wednesday that growing global inflationary risks could lead to higher interest rates and declines in asset values.

In its bi-annual Financial Stability Report, the Reserve Bank of New Zealand (RBNZ) said the country’s financial system remains resilient in the face of COVID-19.

But it noted that more persistent inflationary pressures and any increase in inflation expectations, coupled with weaker growth, could lead to a sudden tightening in financial conditions.

“With the risk of global inflation heightened, already stretched asset prices are facing headwinds from rising global interest rates,” RBNZ Governor Adrian Orr said.

New Zealand Unemployment Rate Drops to Record Low in Q3

New Zealand’s jobless rate fell to an equal record low in the third quarter, beating expectations and sending the Kiwi dollar higher as markets bet the data will prompt a further hike in interest rates later this month.

The unemployment rate fell to 3.4% in the quarter ending September, Statistics New Zealand data showed, far lower than a forecast of 3.9% by economists polled by Reuters.

Wage growth was strong in the quarter with the private sector labor cost index (LCI) recording a 0.7% lift, though just below a forecast 0.8% increase.

The seasonally adjusted employment jumped 2.0% in the quarter, beating forecasts of a 0.4% increase. The participation rate rose to 71.2%, higher than the 70.6% forecast.

Daily Outlook

On Wednesday, the Federal Reserve is widely expected to announce the unwinding of its monthly bond-buying program – a measure it started to support the economy during the pandemic. However, the bigger story for the markets is how the central bank will discuss inflation.

That’s because report after report of hotter-than-anticipated inflation has ramped up expectations that the Fed will fight the trend of higher prices by beginning to raise interest rates next year, about six months sooner than the last Federal Reserve forecast.

Traders are currently pricing in more than two interest rate hikes for next year, while the majority of Fed officials do not even see one in 2022 in their recent forecast.

Look for a sharp break in the AUD/USD and NZD/USD if the Fed indicates three rate hikes in 2022. The Australian Dollar would be hit especially hard because of the dovish tone in yesterday’s RBA policy statement. The New Zealand Dollar could weaken, but gains would be limited because the RBNZ is expected to announce another rate hike later this month.