AUD/USD and NZD/USD Fundamental Daily Forecast – Thin-Holiday Trade Could Fuel Two-Sided Low Volume Trade

The Australian and New Zealand Dollars are trading mixed early Monday, while clawing back most of their early session losses. The Forex markets are a little thin today due to the U.S. bank holiday. Without the major players around, prices could be manipulated by a few big orders. We could also see a two-sided trade. Exaggerated moves in either direction are also a possibility.

At 0733 GMT, the AUD/USD is trading .7194, up 0.0002 or +0.03% and the NZD/USD is at .6611, down 0.0009 or -0.13%.

Earlier today, the Australian Dollar fell to a 20-month low after the Australian Bureau of Statistics (ABS) showed retail sales for July were flat, the weakest result since March. That lagged expectations of 0.3 percent growth and followed a 0.4 percent rise in June.

The report went on to say that clothing and footwear led declines with a 2 percent decline while sales at department stores eased 1.9 percent and household goods retailing faltered 1.2 percent. The declines were offset by gains in food, cafes and restaurants – a category that has remained resilient over the past year or so.

Forecast

After the negative reaction to the retail sales report, the AUD/USD found support at .7166, just above the December 23, 2016 bottom at .7159 and the May 24, 2016 main bottom at .7145. The subsequent rally to higher for the session was likely short-covering tied to the thin trading conditions. We could also be looking at position-squaring ahead of Tuesday’s Reserve Bank of Australia monetary policy decision.

The RBA is expected to keep the official cash rate on hold at the record low 1.50 percent for the second year in a row. However, that hasn’t stopped Westpac, Suncorp and Adelaide Bank from increasing their mortgage lending rates. This news contributed greatly to last week’s sell-off, but the news was underreported.

Both the Aussie and the Kiwi are likely to remain under pressure over the near-term due to U.S. Dollar strength, concerns global economic growth may slow more rapidly and modestly declining commodity prices as Chinese economic growth slows.

The widening interest rate differential between U.S. Government bond yields and Australian and New Zealand government bond yields continues to control the longer-term direction of the AUD/USD and the NZD/USD.

The Fed has already raised U.S. interest rates twice this year to a target range of 1.75 to 2 percent, as a vote of confidence on the surging U.S. economy. Traders are looking for two more rate hikes by the end of the year. This should weaken demand for the Aussie and Kiwi, while increasing demand for the U.S. Dollar.