AUD/USD and NZD/USD Fundamental Daily Forecast – Uncertainty Over US-China Relations Keeping Lid on Rallies

Increased demand for higher risk is helping the Australian and New Zealand Dollars rebound from early session weakness on Monday. However, the move may not last if U.S. equity markets cannot continue their early morning recovery. Trading the Aussie and Kiwi could get tricky this week because traders have to try to determine the catalyst driving the price action.

At 1453 GMT, the AUD/USD is trading .7218, up 0.0001 or +0.02% and the NZD/USD is at .6893, up 0.0006 or +0.09%.

In my opinion, the single biggest influence on the Aussie and Kiwi at this time is U.S.-China relations. Just a week ago, investors were celebrating the truce between the two economic powerhouses that temporarily froze the implementation of additional tariffs for 90 days. Cracks started to appear shortly thereafter because investors weren’t clear on the start date of the truce. Finally, it was determined that the 90-day moratorium on new tariffs began on December 1. This means that trade negotiators have until March 1, 2019 to reach an agreement. The Trump administration has said that this is a hard deadline and President Trump is on record saying he stands ready to go all in and raise tariffs from 10 percent to 25 percent.

Since late last week, U.S.-China negotiations came close to ending abruptly with the arrest of the CFO of Huawei, a major Chinese company. Although the talks continued, the arrest could become a deterrent in the future.

Also last week, U.S. Treasury yields plunged. Furthermore, the 3-year Treasury note yield broke above its 5-year counterpart. This “yield-curve inversion” stoked fears that a recession was forthcoming. However, Aussie and Kiwi traders failed to respond to the drop in yields. Normally, a drop in Treasury yields would’ve made the U.S. Dollar a less-attractive investment, while driving up demand for the Australian and New Zealand Dollars. However, this hasn’t been the case with most investors keeping their focus on U.S.-China trade relations.

Even a Wall Street Journal article saying the Fed is likely to take a “wait-and-see” approach to future rate hikes failed to bring buyers into the AUD/USD and NZD/USD.

Although we’re likely to see periodic rallies tied to oversold conditions or economic data, I don’t think the Australian and New Zealand Dollars will be able to mount a strong rally as long as there is uncertainty over the trade talks.