AUD/USD and NZD/USD Fundamental Weekly Forecast – Aussie Rally Could Be Limited by Strengthening Labor MarketIf Aussie unemployment continues to fall at this pace, the RBA might have to reconsider its commitment to not hike rates for three more years.
The Australian and New Zealand Dollars finished higher last week after testing multi-year highs. An improving outlook for their respective economies and a weaker U.S. Dollar contributed to the rally. The greenback was pressured by a dovish Federal Reserve and the hopes of additional fiscal stimulus from the US Congress. Increased demand for riskier assets also encouraged investors to dump the safe-haven U.S. Dollar.
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The AUD/USD was lifted last week as projection of a faster economic recovery next year, and strong November employment data lifted sentiment.
Australia’s treasurer, Josh Frydenberg, said the economy would grow 4.5% in 2021, up from a previous estimate of 4.25% made just two months before, signaling a quicker recovery from the first recession in three decades. Frydenberg also trimmed the government’s record 2020/21 budget deficit.
Supporting the projection, November employment figures beat expectations, pushing the jobless rate lower in a sign that monetary and fiscal stimulus was bringing the country back on its feet after the pandemic blows.
Frydenberg said resource exports were expected to rise 5% in 2021/22 even with rising tensions with China, the country’s largest trading partner.
New Zealand News
The economy grew a record 14% in the third quarter, and 0.4% annually, beating expectations on both counts as industrial and commercial activity rebounded from the pandemic lows.
Although the Aussie is being well supported by the plunging U.S. Dollar and increased demand for higher risk assets, the rally could be limited because of its strengthening economy.
Last week’s employment numbers probably pleased the Reserve Bank of Australia (RBA), which declared dealing with unemployment a national priority when it cut rates to record lows in November.
However, if unemployment continues to fall at this pace, the RBA might have to reconsider its commitment to not hike rates for three more years and to hold three-year yields at 0.1%.
This means that at some point in the future as the labor market continues to improve, RBA policymakers will now longer continue to say that the cash rate is on hold for a further 3 years, and this could be bearish for the Aussie, or at least encourage enough selling to bring the Aussie back to more reasonable price levels.
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