AUD/USD and NZD/USD Fundamental Daily Forecast – Traders Adjusting Positions to Fed Rate Cut Expectations

The concurrent rallies in the AUD/USD and NZD/USD do not signify a major shift in investor sentiment. What they probably represent is position-adjustments to the drop in the chances of an RBA rate cut in November, and the jump to 93.5% in the probability of a Fed rate cut at the end of October.
James Hyerczyk
AUD/USD and NZD/USD

Optimism over Brexit and increasing hope of a U.S.-China trade deal are helping to drive the Australian and New Zealand Dollars higher on Monday. Aussie traders are also reducing short positions after hawkish comments from Reserve Bank of Australia (RBA) Governor Philip late last week. Although traders expect the Reserve Bank of New Zealand (RBNZ) to trim interest rates in November, the potentially bearish news is being offset by what looks to be an aggressive short-squeeze.

At 07:58 GMT, the AUD/USD is trading .6870, up 0.0014 or +0.20% and the NZD/USD is at .6395, up 0.0009 or +0.135.

Little Concern over Brexit Early Monday

Aussie and Kiwi traders are showing little concern over the delay in the vote over Brexit early Monday. This could change later in the week, but some don’t anticipate any problems.

Foreign Secretary Dominic Raab told the BBC overnight that he was confident enough lawmakers would back the deal this week.

“The weekend’s events, if anything, have further reduced the risk of disorderly exit,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.

Upbeat Comments from US and China

While some traders still see the negatives between the United States and China in trying to reach a substantive long-term trade deal, there is increasing hope over the two parties settling their differences enough to complete phase one of their partial trade deal initially agreed upon October 11.

Late Friday, President Trump said he thought a trade deal between the United States and China would be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on November 16-17.

Meanwhile, Chinese Vice Premier Liu He said on Saturday, “The two sides have made substantial progress in many fields, laying an important foundation for the signing of a phased agreement. Stopping the escalation of the trade war benefits China, the U.S. and the whole world. It’s what producers and consumers alike are hoping for.”

Chance of November RBA Rate Cut Plunge

As of Friday’s close, the financial markets were pricing in just a 16 percent chance of a 25 basis point rate cut in November. This was more than 40 percent on October 15.

Daily Forecast

The concurrent rallies in the AUD/USD and NZD/USD do not signify a major shift in investor sentiment. What they probably represent is position-adjustments to the drop in the chances of an RBA rate cut in November, and the jump to 93.5% in the probability of a Fed rate cut at the end of October.

The rallies are likely to fade after traders start to price in the expected rate cut by the RBNZ in November. Furthermore, although the RBA is likely to pass on a November rate cut, it will eventually make a move to 50 basis points before easing further through asset purchases.

Westpac analysts are saying they expect the RBA to hit 0.5% in February and after that the RBA:  “is likely to be prepared to adopt some form of asset purchase program, if needed, over the course of 2020.”

Wespac analysts also said the RBA may consider policy like the bank loan program adopted by the Bank of England in 2016.

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