AUD/USD and NZD/USD Fundamental Daily Forecast – Traders Adjusting Positions to Plunge in Treasury Yields

The Australian and New Zealand Dollars are trading higher on Thursday. The currencies are being underpinned by yesterday’s dovish policy announcements from the U.S. Federal Reserve. However, solid domestic economic data is helping to produce today’s gains. The rallies taking place are being supported by a combination of short-covering and speculative buying. Fueling most of the move is position-squaring related to the tightening of the interest differential. Investors are being forced to make adjustments to their portfolios due to the plunge in U.S. Treasury yields.

At 08:34 GMT, the AUD/USD is trading .7143, up 0.0025 or +0.35% and the NZD/USD is at .6920, up 0.0036 or +0.52%.

Fed Recap

On Wednesday, the U.S. Federal Reserve left its benchmark interest rate unchanged and projected no rate hikes in 2019. The benchmark rate now stands in a range of 2.25 percent to 2.5 percent. It also said it will stop shrinking its bond portfolio in September, a move that should help hold down long-term interest rates.

In signaling it would refrain from raising rates, central bank policymakers reduced their forecasts from two that were previously predicted in December. They now project one rate hike in 2020 and none in 2021.

Fed policymakers are taking a break from further rate hikes partly in response to slowdowns in the US and global economies. However, it did note that while the job market remains strong, “growth of economic activity has slowed from its solid rate in the fourth quarter.” The Fed now sees economic growth of just 2.1 percent this year, down from its previous projection of 2.3 percent growth.

Australian Employment Report

Early Thursday, the Australian Bureau of Statistics (ABS) reported a total 4,600 net new jobs were created in February with all of the increase led by part-time work. Although February’s number was small compared to the downwardly revised 38,300 employment growth recorded the previous month, the data showed the overall trend in the labor market was still positive.

Additionally, the Unemployment Rate fell to 4.9%, down from 5.0% and lower than the forecast. This means the jobless rate is now near an eight-year low. A drop in the participation rate to 65.6 percent from 65.7 percent was the reason for the drop in the rate.

New Zealand Gross Domestic Product

New Zealand’s economy grew in line with the forecast in the fourth quarter, led by solid gains in the retail and accommodation sectors. These sectors posted their biggest jumps in activity since the 2011 Rugby World Cup.

According to Stats New Zealand, gross domestic product expanded 0.6 percent in the three months to December 21 versus a 0.3 percent rise in the September quarter and was 2.3 percent higher than the same quarter a year earlier.

Economists were looking for GDP to expand 0.6 percent on the quarter and 2.5 percent on the year, according to the median in a Bloomberg poll. Earlier in the month, the Reserve Bank of New Zealand had forecast an expansion of 0.8 percent.

“Growth this quarter was led by a 0.9 percent rise in service industries, while the goods-producing industries grew 0.2 percent,” national accounts senior manager Gary Dunnet said.

Daily Forecast

The AUD/USD is rallying because the drop in the jobless rate is lowering expectations the Reserve Bank of Australia (RBA) won’t cut interest rates any time soon. However, traders still believe the RBA will make its first rate cut in August.

Although New Zealand’s economy grew less than the Reserve Bank of New Zealand (RBNZ) expected in the fourth quarter, the price action in the NZD/USD indicates the data is not likely to spur any change in the Reserve Bank’s message at next week’s policy review.

Given the current data on economic growth, we’re looking for the RBNZ to acknowledge that the economy has lost a little momentum, but not enough to shift the central bank out of its data-dependent neutral mode. Nonetheless, the weak data still has some analysts penciling a rate cut for November.