AUD/USD and NZD/USD Fundamental Weekly Forecast – After Last Week’s Weak Reports, US CPI Will Set Tone

James Hyerczyk

The Australian and New Zealand Dollars finished higher last week with the Aussie eking out a small gain. Once again short-covering was behind the move as bearish traders lightened up their positions in response to increasing chances of a Fed rate cut at the end of the month. There was also some debate as to whether the Reserve Banks of Australia and New Zealand would take a pass on a rate cut in November. However, that may be decided by what the Fed does on October 30.

Last week, the AUD/USD settled at .6766, up 0.0001 or +0.01% and the NZD/USD finished at .6315, up 0.0019 or +0.30%.

New Zealand Dollar

Nearly two weeks ago, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate unchanged at 1%, but said there is still scope for further stimulus if necessary. The RBNZ said that new information it had received since the last Monetary Policy Statement by the bank in August “did not warrant a significant change to the monetary policy outlook”.

The statement from the RBNZ was rather more upbeat than the markets were expecting and the odds on a November rate cut were reduced.

Since then, however, economists have said that a lower OCR remains in the cards. Furthermore, the recent sell-off in the New Zealand Dollar suggests traders are pricing in a 25 basis point cut next month.

Australian Dollar

The Australian Dollar is in a downtrend and bearish with further rate cuts to come perhaps later this year and in 2020.

At its policy meeting on October 1, the Reserve Bank of Australia (RBA) cut its benchmark interest rate 25 basis points as widely expected. This was the third cut since June. The sum of the three cuts have driven rates to 0.75%.

The rate cuts are expected to keep coming according to RBA Governor Philp Lowe, with some whispering that quantitative easing is also on the table.

“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation,” he said in his statement.

“The board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target.”

“The economy still has spare capacity and lower interest rates will help make inroads into that.”

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”

Weekly Forecast

Last week, the bearish outlook for the Aussie and Kiwi took a backseat to weak U.S. economic data that drove down U.S. Treasury yields and hence the U.S. Dollar.

The issues to be debated this week will be whether the Fed is considering another rate cut at the end of the month, and whether the RBA and RBNZ will follow with another cut of their own in November.

Last week, the chances of a Fed cut rose from 20% to 93.5% after the release of a pair of weaker than expected U.S. reports, however, the chances dropped to 76.4% on Friday as bets the U.S. Federal Reserve would cut interest rates aggressively this year were tempered after better-than-expected U.S. jobs data.

This week’s price action will likely be dominated by three speeches from Fed Chair Powell, the FOMC Meeting Minutes and reports on U.S. Consumer Inflation.

Powell is likely to continue to be ambiguous and less-dovish than market expectations. The minutes are likely to reflect the same tone due to the split vote at the policy meeting. Consumer inflation data will likely seal the fate of the next Fed decision. Strong data will encourage the Fed to take a pass on a rate cut.

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