AUD/USD and NZD/USD Fundamental Weekly Forecast – Expect Dovish Tone from RBNZ

This week, the RBNZ will make its first interest rate decision since November. Since then a lot has taken place with the majority of major central banks downgrading their outlooks for the global economy. The RBNZ is expected to leave its benchmark rate at 1.75%.
James Hyerczyk
New Zealand Dollars

The Australian and New Zealand Dollars finished sharply lower last week after the Reserve Bank of Australia led by Governor Philip Lowe abandoned a policy tightening bias and instead sees the chances of an interest-rate cut or a hike as “more evenly balanced”.  The New Zealand Dollar tumbled last week in sympathy with the drop in the Australian Dollar and in anticipation of a similar tone from the Reserve Bank of New Zealand (RBNZ) this week. Essentially, investors started to price in a potential rate cut later in the year.

For the week, the AUD/USD settled at .7089, down 0.0158 or -2.18% and the NZD/USD settled at .6745, down 0.0148 or -2.15%.

Australian Dollar

Early last week, the RBA kept its cash rate at a record-low 1.5 percent for a 30th month but dropped its long-standing prediction that an improving economy meant the next move was likely to be upwards.

In its monetary policy statement, the RBA lowered its forecast for gross domestic product (GDP) growth for the year to the end of June to 2.5 percent, down from 3.25 percent. The RBA also slashed its inflation forecast for the 12 months to June 30 from 2 to 1.25 percent.

The central bank cited slowing growth in other advanced economies, sluggish consumer spending and the ongoing property market correction for the shift in policy.

“This reassessment of the outlook for consumption is informed by the downward revision in the national accounts and, to some extent, the recent declines in housing market activity,” the RBA said in the quarterly statement.

Given the dovish comments last week from Dr. Lowe and the RBA policymakers, futures traders are beginning to price in as many as two rate cuts later this year.

New Zealand Dollar

In addition to the sympathy break, helping to drive the Kiwi lower was a weaker-than-expected labor market report. The quarterly Employment Change was 0.1%. This was well-below the 0.3% forecast. The previous quarter was also revised lower to 1.0%. Additionally, the quarterly Unemployment Rate surged to 4.3%, higher than the 4.1% forecast. The previous quarter was revised higher to 4.0%.

Weekly Forecast

This week, the RBNZ will make its first interest rate decision since November. Since then a lot has taken place with the majority of major central banks downgrading their outlooks for the global economy. In November, RBNZ Governor Adrian Orr said the central bank is not taking cuts off the table, however, last week’s price action indicates that traders are pricing in about a 42% chance of a cut as soon as June 2019.

The RBNZ is expected to leave its benchmark rate at 1.75%.

In the U.S., the key events that could impact the AUD/USD and NZD/USD will be a speech by Fed Chair Jerome Powell. He’ll exert more influence on the financial markets if he talks about monetary policy and especially the slowing global economy.

On Wednesday, traders will get the opportunity to react to the latest government figures on consumer inflation. CPI is expected to come in at 0.1%, up slightly from the previously reported -0.1%. Core CPI is expected to have grown by 0.2%.

On Thursday, U.S. Core Retail Sales are expected to come in flat at 0.0%. Retail Sales are expected to have risen by 0.1%. Producer Prices may have risen by 0.1%.

The low inflation numbers aren’t expected to have much of an influence on Fed policy since it has predicted muted inflation. Much lower than expected numbers could drive Treasury yields lower which would make the U.S. Dollar a less-desirable asset.

We may not see the same degree of selling pressure on the Australian and New Zealand Dollars this week because some of the dovish news has already been priced into the currencies. Furthermore, some believe that last week’s sell-offs may have been overextended. Any positive develops over U.S.-China trade negotiations could slow down the selling or even fuel a short-covering rally.

Please let us know what you think in the comments below. 

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