AUD/USD and NZD/USD Fundamental Daily Forecast – Trounced by Global Shift in Rate Risks

The Australian and New Zealand Dollars are inching higher early Wednesday in what can best be described as an attempt at a technical “dead cat bounce” after getting pummeled the previous session.

The catalyst behind yesterday’s steep decline was a red-hot report on U.S. consumer inflation that destroyed risk sentiment and beat up bonds as financial market traders priced in higher interest rates across all major economies.

At 05:08 GMT, the AUD/USD is trading .6736, up 0.0044 or +0.07% and the NZD/USD is at .6005, up 0.0003 or +0.05%. On Tuesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $66.63, down $1.53 or -2.25%.

Jump in Core US Inflation Supports More Aggressive Fed Rate Hikes

A shocking 0.6% jump in core U.S. consumer prices crushed hopes that inflation had peaked in the United States and that the Fed could pullback the reins on super-sized rate hikes starting at its November 1-2 meeting.

Some traders are now expecting a full point rate hike from the U.S. Federal Reserve at its September meeting, according to the CME FedWatch tracker of Fed funds futures bets.

The probability of a 100-basis-point rate hike rose to 33% from 0%, and the chance for a three-quarter point hike fell to 67% from 91% a day earlier.

The U.S. Dollar gained ground against the Aussie as investors reacted to a jump in the U.S. 2-year Treasury yield, which reached 3.79%, the highest level since 2007.

Australian Dollar Traders Expecting RBA to be More Aggressive

With the markets now looking for a full-point hike in the United States, traders have now revived wagers the Reserve Bank of Australia (RBA) could hike by 50 basis points to 2.85% at its October meeting.

Financial market traders had shifted toward quarter-point moves last week when RBA Governor Philip Lowe seemed to open the door to a slower pace of tightening. Futures traders also shifted to pricing in a peak for rates around 3.80%, adding back in a quarter-point rise to the profile.

NZ Current Account Deficit Approaching Record Levels

The deficit between what New Zealand gets from exports and what it spends on imports has, on an annual basis, grown to its highest level since the record high of 2008 during the Global Financial Crisis.

Statistics New Zealand reported that the annual current account deficit to June was 7.7% of GDP, which is just below the highest ever deficit-to-GDP, 7.8% recorded in December 2008.

The 7.7% figure is somewhat higher than economists were picking, with a market consensus forecast of 7.5%.

Looking Ahead …

Later today, traders will get the opportunity to react to the latest U.S. producer price inflation figures at 12:30 GMT. The U.S. Producer Price Index (PPI) is expected to come in at -0.1%. Core PPI is expected to have risen 0.3%. Higher-than-expected readings could drive the AUD/USD and NZD/USD sharply lower for a second session.

Domestically, the major reports out of Australia early Thursday will be the Employment Change and Unemployment Rate. These reports are important because they will help the RBA determine whether to hike rates 50 basis points or 75 basis points at its next meeting.

Forecasts are for the jobless rate to hold at 3.4% and employment to bounce 35,000, after July’s drop of 40,900.