AUD/USD and NZD/USD Fundamental Daily Forecast – Traders Bracing for Another RBA Rate Hike

The Australian and New Zealand Dollars are edging higher early Monday after recovering from early session weakness. The price action suggests traders may be squaring positions and taking profits ahead of the Reserve Bank of Australia’s (RBA) monetary policy and interest rate decisions on Tuesday. New Zealand is on a bank holiday so trading volume is well-below average.

At 04:31 GMT, the AUD/USD is trading .6940, up 0.0018 or +0.26% and the NZD/USD is at .6329, up 0.0003 or +0.05%. On Friday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.47, down $1.62 or -2.32%.

Aussie, Kiwi Traders Still Reacting to Friday’s Sentiment Shift

Early in the session, the Australian and New Zealand Dollars were being pressured by follow-through selling tied to Friday’s sentiment shift toward a more hawkish Federal Reserve and stronger U.S. Dollar.

To recap, a stronger-than-expected U.S. Non-Farm Payrolls report fueled a massive turnaround in sentiment after the data indicated the Fed could continue to lift rates aggressively in order to tame inflation.

Last Wednesday, the Aussie and Kiwi surged after traders began pricing in an early end to the Fed’s rate hikes. Traders believed the Fed would stop raising rates in March with a terminal rate of about 4.88%. Furthermore, they also priced in possibly two rate cuts before the end of year.

After the jobs report, traders priced in the last rate hike for June and a terminal rate of 5.03%. Now they have to trim their long positions in order to meet the change in expectations. This is the reason for the sell-off.

Reserve Bank of Australia to Raise Its Benchmark Interest Rate

The Reserve Bank of Australia (RBA) is widely expected to increase its benchmark interest rate on Tuesday. Most economists and traders see the Reserve Bank lifting its cash rate by a quarter-point to 3.35%, the highest level since September 2012.

Ahead of the decision, the RBA finds itself in a difficult spot, a position shared by a few central banks. It has to raise interest rates to fight uncomfortably hot core inflation at the same time data is showing a cooling economy. But as Andrew Ticehurst, macro strategist at Nomura Holdings Inc. in Sydney puts it, “The risk would be for a larger move, rather than no move, in our view.”

The RBA had forecast fourth-quarter CPI would be the peak. What they didn’t predict was the underlying strength of inflation, with the key trimmed mean gauge soaring to 6.9% from 6.1% in the third quarter, and higher than the RBA’s 6.5% forecast, according to Bloomberg.

Short-Term Outlook

With the RBA saying repeatedly that it’s “not on a pre-set path” on rates and that it will do “what is necessary” to bring inflation back to its 2-3% target, in addition to its 25 basis point rate hike, we expect policymakers to suggest that more tightening is needed.