AUD/USD and NZD/USD Fundamental Weekly Forecast – Cooling U.S. Inflation, Softening Fed Could Underpin Prices

The Australian and New Zealand Dollars surged last week in reaction to signs inflation data and the Fed may be slowing enough to change the pace of future U.S. interest rate hikes. Furthermore, strong employment data in Australia increased the chances of an earlier than expected rate hike. Additionally, Kiwi traders are still reacting to the news from the previous week that the Reserve Bank of New Zealand has probably taken a possible rate cut off the table.

Last week, the AUD/USD settled at .7332, up 0.0104 or 1.43% and the NZD/USD finished at .6878, up 0.0140 or +2.07%.

Domestically in Australia, the Wage Price Index came in at 0.6% as expected, but the previous month was revised lower to 0.5%.

The Employment Change showed the economy added 32.8K jobs, beating the 19.9K forecast. The previous month was revised upward to 7.8K jobs. The Unemployment Rate dipped to 5.0%. This matched the previous reading, but came in below the 5.1% forecast.

The news means the economy has met the Reserve Bank of Australia’s definition of “full employment” for two months in a row, despite the existence of a large cohort of workers who say they want to be working more hours.

Despite the strong employment data, RBA deputy governor, Guy Debelle, warned the recent decision by major banks to clamp down on lending to residential property developers risks overshooting and contributing to a “protracted” downturn in the housing market.

Speaking before a business audience in Melbourne, Debelle said he thinks the tightening in lending to developers is “higher risk to the economic outlook” than the clampdown on lending to homebuyers, which has enhanced risk.

Essentially, Debelle was saying that the strength of the labor market must be weighed against the risks in the housing market, which are many.

Also driving the AUD/USD and NZD/USD higher last week were lower Treasury yields. The catalysts behind the move were an easing of concerns about overheating inflation and the Fed’s softening tone about economic growth. Traders were primarily reacting to the October consumer inflation report and somewhat dovish comments from Fed Chairman Jerome Powell and Fed Vice-Chairman Richard Clarida.

In the U.S., a report on consumer prices showed inflation rising as much as forecast on a month over month basis.

According to the U.S. Labor Department, the Consumer Price Index rose 0.3 percent last month, the biggest gain since January after edging up 0.1 percent in September. In the 12 months through October, the CPI increased 2.5 percent, picking up from September’s 2.3 percent rise.

Excluding the volatile food and energy components, the CPI climbed 0.2 percent. The so-called Core CPI had gained 0.1 percent for two straight months. In the 12 months through October, the core CPI increased 2.1 percent after advancing 2.2 percent in September.

Traders were looking for the CPI to climb 0.3 percent and the core CPI to gain 0.2 percent in October.

Federal Reserve Chairman Jerome Powell expressed confidence in U.S. economic strength, but added during a question-and-answer session that the global economy is not growing at the same pace it was last year. He described the global picture as a “gradual chipping away” at the pace of growth but said it is “not a terrible slowdown.”

Atlanta Fed President Raphael Bostic, in a speech delivered in Barcelona, said that the federal funds rate is “not too far” from neutral.

Federal Reserve Vice-Chair Richard Clarida said the central back is close to the point of being “neutral” on interest rates and should predicate further increases on economic data. “Neutral” is the point where Fed policy is neither restrictive nor stimulative.

Forecast

The Aussie and Kiwi strengthened last week because traders perceived the events as a bit dovish, encouraging the need for traders to aggressively adjust short positions. The CPI report, for example, suggested inflation is not overheating and may even be close to slowing down because of the plunge in crude oil and gasoline prices. The Fed comments also suggest a softer tone may be developing at the central bank. These factors could combine to convince the Fed to slow down the pace of rate hikes in 2019.

At this time, the Fed is expected to raise rates in December and as many as three times in 2019. Powell said that every meeting will be “hot”, which means the central bank could raise rates at any meeting. However, the data and comments suggest the number of rate hikes next year could be reduce or pushed further into the future.

The news could continue to encourage AUD/USD and NZD/USD investors to adjust positions to reflect the slower pace of rate hikes, this could continue to underpin prices this week.

In Australia, the Reserve Bank of Australia is scheduled to release its Monetary Policy Meeting Minutes early Tuesday at 0330 GMT.

In the U.S., the major report is Core Durable Goods on Wednesday at 1330 GMT. It is expected to have risen 0.4%.

It is a holiday shortened week so watch for lower than average volatility.