AUD/USD and NZD/USD Fundamental Daily Forecast – With Trade Talks “Everything is on The Table”

The Australian and New Zealand Dollars are trading higher on the back of better-than-expected consumer inflation data from Australia, expectations of a dovish Federal Reserve and optimism over the outcome of the high-level U.S.-China trade negotiations. Gains could be limited, however, because both the Reserve Bank of Australia and the Reserve Bank of New Zealand have no intention of hiking interest rates for a long time.

At 07:50 GMT, the AUD/USD is trading .7196, up 0.0040 or +0.55% and the NZD/USD is at .6849, up 0.0015 or +0.21%.

Aussie Headline CPI Beats Forecast, but Core Misses RBA Target Band

Australian consumer inflation beat forecasts last quarter, but core inflation ended 2018 below the central bank’s target band. This reaffirmed the view that interest rates will remain at record lows over the long-run.

Traders liked the headline number, sending the Australian Dollar higher and just below its early January top at .7236 and its mid-December top at .7247. This price action is likely related to optimism over the outcome of the US-China trade talks and expectations of a dovish message from the U.S. Federal Reserve.

The headline consumer price index (CPI) rose 0.5 percent in the December quarter, surpassing forecasts for a 0.4 percent increase.

“Annual CPI inflation ran at 1.8 percent, again beating estimates. Key measures of underlying inflation favored by the Reserve Bank of Australia (RBA) averaged around 1.75 percent for the year, in-line with forecast,” according to Reuters.

Reuters also reported that “core inflation has now undershot the RBA’s long-term target band of 2 percent to 3 percent for 12 straight quarters, the longest stretch since the series began.”

Fed Will Leave Rate Unchanged, Powell Will Tone Down Remarks

The Fed is widely expected to leave its benchmark interest rate unchanged. Although the expected moves by the central bank are going to be perceived as dovish, Federal Reserve Chairman Jerome Powell is expected to tone down his comments to avoid fueling a volatile response by equity traders.

Investors are looking for the Fed to direct remarks toward the balance sheet, patience and data dependence.

Last Chance for US and China to Make Deal Before March 1 Deadline

Investors will be watching out for developments from the high-level trade negotiations between the United States and China. Traders are saying that these 2-day meetings will have an impact on the markets given the recent volatility tied to the economic slowdown in China and its impact on the global economy.

The two day meetings are taking on added importance because they may be the last before a March 1 deadline to get the deal done. President Trump and China’s Xi Jinping gave their officials 90 days to work out a deal on “structural changes” to China’s economic model. If they fail, Trump has promised to raise the tariff rate on $200 billion in Chinese imports to 25 percent from 10 percent.

Forecast

The AUD/USD and NZD/USD, which are often seen as proxies for the Chinese economy, will be at the forefront of the trade talks between the United States and China. Investors have already priced in the Fed decisions so I don’t expect them to have too much of an influence on the price action today. The direction of the currencies will be mostly influenced by trader reaction to any new developments from the trade talks.

The meetings are expected to start with a ray of optimism after U.S. Treasury Secretary Steven Mnuchin said that if China presents enough trade concessions to President Trump, there’s a chance the administration may lift all tariffs.

“Everything is on the table,” Mnuchin said early Tuesday during an interview on Fox Business Network.