AUD/USD and NZD/USD Fundamental Weekly Forecast – Despite Polls to Contrary, RBA Could Make Surprise Rate Cut

The Australian Dollar plummeted last week, falling in sympathy with the Chinese Yuan as investors fretted about the hit to the Chinese economy from the coronavirus.

Sellers also reacted to a report showing China’s factory activity weakened ahead of the coronavirus outbreak. The purchasing managers’ index for manufacturing reached 50 this month, lower than last month’s 50.2 but in line with what analysts polled by Reuters expected.

Traders are discounting the news because it doesn’t reflect the impact of the virus on the economy. This will show up in the following months.

In economic news, Australian quarterly inflation rose 0.7%, higher than the 0.6% forecast, according to the Australian Bureau of Statistics. The annual pace climbed to 1.8%. This was below the Reserve Bank of Australia’s target of around 2% to 3%.

Last week, the AUD/USD settled at .6687, down 0.0139.

New Zealand Dollar

The New Zealand Dollar was pressured last week by concerns over the coronavirus crisis. The catalysts behind the weakness were lower demand for higher-yielding currencies, and a plunged in commodities. Traders were particularly worried about a plunge in tourism dollars.

Former Bank of New Zealand chief economist Tony Alexander said, “The virus outbreak is likely to depress the tourism industry worldwide as people choose to stay home rather than risk exposure in crowded airplanes, buses and terminals. And it is worth adding in the slowly growing effect of the flight-shaming movement coming out of Europe.”

Also last week, data showed New Zealand’s annual trade deficit came in at $4.3 billion, down from the $4.7 billion expected.

Last week, the NZD/USD settled at .6463, down 0.0145 or -2.19%.

Weekly Forecast

AUD/USD and NZD/USD traders are bracing for a plunge in Chinese stocks when the exchanges re-open on Monday. This could trigger a worldwide sell-off in equities. If this is the case then investors will be encouraged to dump the higher-yielding Australian and New Zealand Dollars. Money should then flow into the safe-haven Japanese Yen and Swiss Franc.

Reserve Bank of Australia

The Reserve Bank of Australia will likely hold its cash rate at a record low of 0.75% on Tuesday, February 4, but cut at least once more later this year, a Reuters poll showed, amid signs the country’s economy was still stuck in a slow lane.

A majority of the 32 respondents expect the RBA to keep its benchmark rate at 0.75% at its February 4 policy review. Most economists pushed back their prediction to April, from February, just last week after better-than-expected employment data for December.

As many as 23 or 32, or nearly 72%, forecast rates at 0.5% before June with three predicting deeper cuts to 0.25%.

Economists’ predictions align with market pricing which shows little chance of a move in February. Futures are predicting a 60% chance of a cut to 0.50% in April.

China “The Wildcard” – Don’t Be Surprised by RBA Rate Cut

There is no question that the coronavirus outbreak will weaken China’s economy, but will it also be a drag on Australia’s economy. Because of this, I am certain that RBA policymakers will discuss this developing situation with some even building a strong case to cut now instead of after the dust settles.

Don’t be surprised by a rate cut. It’s not going to hurt the economy at this point. Furthermore, with the Australian Dollar down so much from its December high and traders already pricing in a near-term rate cut, why not just do it now?