AUD/USD and NZD/USD Fundamental Weekly Forecast – Focus Will Remain on U.S. Treasury Yields, Inflation Data

The Australian and New Zealand Dollars tumbled last week to multi-year lows, driven by a sharp rise in U.S. Treasury yields and hawkish talk from U.S. Federal Reserve Chairman Jerome Powell.

The rise in interest rates led to a widening of the interest rate differential between U.S. Government bond yields and Australian and New Zealand Government yields. This helped make the U.S. Dollar a more attractive investment.

For the week, the AUD/USD settled at .7049, down 0.0168 or -2.33% and the NZD/USD closed at .6437, down 0.0182 or -2.75%.

Essentially, it’s the divergence in monetary policy between the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand that is driving the price action.

Last week, the Reserve Bank of Australia left its benchmark interest rate unchanged at a historically low 1.50%. It also suggested that while the economy is expected to improve, there are still issues with housing and lower wages that are preventing the RBA from raising interest rates. Traders don’t expect the central bank to begin raising rates until early 2020.

Two weeks ago, the Reserve Bank of New Zealand also left its benchmark interest rate unchanged. Traders are saying that the next move by the RBNZ could actually be an interest rate cut.

In other news, Australian Building Approvals fell 9.4%. However, the Trade Balance came in better-than-expected at 1.60 billion and Retail Sales rose 0.3%.

In the U.S., the headline grabbing nonfarm payrolls increased by 134,000 jobs in September, the fewest in a year. However, data for July and August was revised to show 87,000 more jobs added than previously reported. Average hourly earnings rose 8 cents, or 0.3 percent, in September after rising 0.3 percent in August. The unemployment rate fell from 3.9 percent to 3.7 percent.

Federal Reserve Chairman Jerome Powell moved Treasury yields and the U.S. Dollar when he said the central bank has a ways to go yet before it gets interest rates to where they are neither restrictive nor accommodative.

“The really extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. They’re not appropriate anymore,” Powell said.

“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.”

Powell’s comments and strong U.S. economic data helped drive the 10-year U.S. Treasury yield to its highest level since 2011. The 30-year Treasury yield hit its highest level since 2014. Both moves helped make the U.S. Dollar a more attractive investment.

Forecast

There are no major reports from Australia and New Zealand this week. In the U.S., investors will get the opportunity to react to Producer and Consumer Inflation data. The PPI is expected to show an increase of 0.2%, up from -0.1%. The CPI is forecast to show an increase of 0.2%, up from 0.1%

This week, investors will be focusing on oversold technical conditions that could lead to profit-taking and a possible counter-trend short-covering rally. Investors will also be keying in on U.S. Treasury yields.

If yields continue to rise then the AUD/USD and NZD/USD are likely to remain under pressure. Weaker than expected U.S. inflation data should drive Treasury yields lower. This should trigger a short-covering rally by the Aussie and the Kiwi.