AUD/USD and NZD/USD Fundamental Weekly Forecast – Fed Policy Decision, Aussie CPI, US-China Trade Talks on Tap

The Australian and New Zealand Dollars closed higher last week, but both currencies took different routes toward these gains.

The Aussie was pressured all week due to concerns over the slowing economy in China and worries over U.S.-China trade relations. Additionally, a move by a major bank may force the Reserve Bank of Australia (RBA) to consider a rate cut later in the year.

The Kiwi was down early in the week but turned around following the release of better-than-expected consumer inflation data, which may have reduced the chances of a rate cut by the Reserve Bank of New Zealand (RBNZ).

Both the Aussie and Kiwi were boosted by a report that said the U.S. Federal Reserve is considering ending its policy to reduce its balance sheet. This is potentially dovish and bearish for the U.S. Dollar. The news came as a surprise and generated enough short-covering to turn the Australian and New Zealand Dollars higher for the week.

Last week, the AUD/USD settled at .7178, up 0.0013 or +0.19%. The NZD/USD finished at .6841, up 0.0096 or +1.43%.

Australian Dollar

The Australian Employment Change came in at 21.6K, higher than the 17.3K estimate. The previous month was revised higher to 39.0K. The Unemployment Rate fell to 5.0% from 5.1%.

The National Australia Bank said it would raise mortgage rates by 12 to 16 basis points. This raised concerns over rising indebtedness at households and the economy overall, leading investors to price in the strong possibility of an interest rate cut later in the year.

New Zealand Dollar

Quarterly inflation rose by 0.1 percent in the fourth quarter of 2018, a little weaker that the Reserve Bank of New Zealand’s (RBNZ) forecast of 0.2 percent and below the 0.9 percent rise in the previous period.

Year-on-year inflation was at 1.9 percent, in line with the third-quarter figures and slightly below RBNZ’s target mid-point of 2-percent.

Economists had forecast year-on-year inflation to ease to 1.8 percent and quarter-on-quarter inflation to stay flat.

Chances of RBNZ Rate Cut Reduced

According to data compiled by Reuters, before the inflation data announcement the market was pricing in a 50 percent chance that the RBNZ’s next move would be to cut interest rates this year. In November, the RBNZ struck a neutral tone saying its next move would depend on how the economy fared and cautioned of downside risks from global trade frictions.

Forecast

The major news events are in the Australia and the United States this week.

In Australia, quarterly Consumer Inflation is expected to have risen 0.4%. Trimmed Mean CPI is expected to have risen 0.4%. Weaker-than-expected data will increase the chances of a RBA rate hike later this year.

On Wednesday, January 30, the Fed will release its interest rate decision and monetary policy statement. This will be followed by a press conference.

The Fed is widely expected to leave its benchmark interest rate unchanged. Additionally, it may announce it is considering ending its policy to reduce its balance sheet. Both moves are dovish because they point towards an easing of monetary policy. This could drive Treasury yields lower, making the U.S. Dollar a less-attractive investment.

On Friday, traders will be watching the U.S. Non-Farm Payrolls report. It is expected to show the economy added 165K jobs in January. The unemployment rate could drop to 3.8% and Average Hourly Earnings are expected to come in at 0.3%.

Additional reports are Conference Board Consumer Confidence and ISM Manufacturing PMI.

The wildcard is the impact of the opening of the government and the start of high level trade talks between U.S. and Chinese officials on January 30-31. The Australian Dollar will be especially impacted by any news from the meetings.

Dovish changes in Fed policy could drive the AUD/USD and the NZD/USD higher.