AUD/USD and NZD/USD Fundamental Daily Forecast – Underpinned by Increased Demand for Risk

The Australian and New Zealand Dollars are trading slightly lower early Wednesday, but threatening to turn higher for the session. Technical factors may be contributing to the early strength as well as safe haven buying. The longer-term fundamentals are still bearish, however, due to the prolonged move down in terms of price and time, the currencies may be ripe for a short-covering rally.

At 0240 GMT, the AUD/USD is trading .7185, down 0.0001 or -0.01% and the NZD/USD is at .6588, down 0.0005 or -0.07%.

Increased demand for higher-yielding assets may also be contributing to the gains. The Euro is trading higher after several days of weakness tied to escalating financial issues between Italy and Euro Zone officials. This may be fueling today’s short-covering rally. U.S. equity markets are also firming in pre-market trading.

In economic news, U.S. Federal Reserve Chairman Jerome Powell sees the U.S. economy generating highly optimistic expectations, with the unusual combination of low unemployment and inflation fueling hopes for an extended expansion.

Early Tuesday, the Reserve Bank of Australia left its benchmark interest rate unchanged at 1.50%. Although it expressed concerns over the weakening housing market, it still showed confidence in economic and job growth.

New Zealand business confidence came in much lower than expected, raising concerns that the next major move by the Reserve Bank of New Zealand would be a rate cut.

Forecast

AUD/USD and NZD/USD price action early in the session suggests traders may have found support. The lack of follow-through to the downside may be indicating that bearish traders are becoming reluctant to sell weakness at current price levels and after a steep decline.

The AUD/USD is trying to establish support inside a retracement zone at .7200 to .7172. The key area for the NZD/USD is .6600 to .6576.

If increased demand for risk is driving the Forex pairs higher, then they should receive support from higher stocks and an easing of tensions between Italy and the European Union. If risk aversion returns then look for a resumption of the downtrend.

Wednesday is a big day as far as U.S. economic data is concerned. The slew of data could move the AUD/USD and NZD/USD, but it doesn’t have to especially if the price action is being driven by a reaction to the situation in Italy.

The U.S. session starts with a speech from FOMC Member Barkin and ends with a speech by Fed Chair Powell. Sandwiched in between are speeches by FOMC Member Brainard and FOMC Member Mester.

As far as economic data is concerned, the ADP Non-Farm Employment Change report will give investors an early peek at Friday’s U.S. Non-Farm Payrolls report. It is expected to show the private sector of the economy added 185K jobs in September.

Final Services PMI is expected to come in at 52.9. The major report is the ISM Non-Manufacturing PMI. It is forecast at 58.0, down slightly from 58.5.

Longer-term, the AUD/USD and NZD/USD are bearish because of the divergence in the monetary policies of the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand. However, short-term worries over Italy could dominate the trade.