AUD/USD and NZD/USD Fundamental Daily Forecast – Underpinned by Trade Talk Positives, Dovish Fed Policy

The Australian and New Zealand Dollars are trading mixed early Thursday after posting strong gains during yesterday’s session. Today’s price action suggests that Aussie traders remain positive about the outcome of U.S.-China trade negotiations although gains are likely being limited by weaker-than-expected Chinese consumer inflation data. Both currencies are benefitting from the dovish tone of the Fed minutes released on Wednesday because they are putting pressure on the U.S. Dollar.

At 0632 GMT, the AUD/USD is trading .7184, up 0.0015 or +0.18% and the NZD/USD is at .6784, down 0.0006 or -0.08%.

In addition to the fresh news, both the Aussie and the Kiwi continue to benefit from last week’s decision by the Peoples Bank of China to lower the reserve requirements for banks. This move provided more stimulus for the country and may have been the first step in as many as four this year to provide liquidity for the economy.

U.S.-China Trade Talks

Most traders feel this round of trade talks between the United States and China, which concluded on Wednesday after three days, were a positive first step, however, there are still challenges ahead.

In a statement, a U.S. government trade representative said that officials discussed “needed structural changes in China” on matters such as forced technology transfers, intellectual property protection and cyber theft.

The Chinese Commerce Ministry also issued its own statement saying the talks with the U.S. were extensive and established a foundation for the resolution of each other’s concerns.

China Inflation Data

According to official government reports, China’s December consumer inflation (CPI) rose 1.9 percent on year. That was lower than the experts’ expectations of 2.1 percent growth. Producer inflation rose 0.9 percent on-year in December, which was lower than the 1.6 percent economists were expecting.

Fed Minutes

The U.S. Federal Reserve minutes from its December policy meeting reiterated comments from Fed Chairman Jerome Powell last Friday with the theme centering on patience regarding monetary policy.

In the minutes, Federal Open Market Committee members acknowledged muted inflation in the U.S., meaning the Fed can “afford to be patient about further policy firming.” The minutes also indicated that some policymakers think a “relatively limited amount” of rate hikes may be coming in 2019.

Forecast

The current price action in the AUD/USD and NZD/USD indicate that investors remain positive that a US-China trade agreement could be in place by March 1, or at the end of the tariff truce between the two economic powerhouses. However, any deal may just be a preliminary step toward a longer-term solution. Both sides have some hard concerns that may not be addressed in any preliminary agreement.

Although the inflation data was lower than expected, traders know that China’s economy is under pressure so this isn’t much of a surprise. Investors are now looking forward, hoping that the new stimulus will help revive the economy or at least slow down the weakness.

The dovish Fed is having a greater impact on the Aussie and Kiwi, in my opinion, because traders had priced in as many as three rate hikes for 2019 prior to the Fed statement in December and as many as two raises before Powell’s dovish comments last Friday. So positions have to be adjusted. This position-adjusting is currently driving the Australian and New Zealand Dollars higher.

Today, investors will get the opportunity to react to several Fed speakers and Fed Chair Jerome Powell. With the Fed already indicating a softer tone, it’s hard to conceive Powell saying anything, but reiterating his dovish tone. If he slips up and says something hawkish then we could see some selling pressure.

Early Friday, Australia will release the latest Retail Sales report. It is expected to show a 0.3% increase.