AUD/USD and NZD/USD Fundamental Weekly Forecast – Geopolitics, Economic Data, Fed Rate Decision Drives Price Action

The Australian and New Zealand Dollars closed lower last week, pressured by a firmer U.S. Dollar and rising Treasury yields. Fundamentally, investors were shaken by new uncertainties over Brexit, which raised enough concerns to offset any positive developments over U.S.-China trade relations.

Domestically, central bank concerns dominated the trade ahead of this week’s U.S. Federal Reserve interest rate and monetary policy decisions on Wednesday. Traders also reacted to rising expectations of a November interest rate cut and talk of future loosening by the Reserve Bank of Australia (RBA).

Last week, the AUD/USD settled at .6821, down 0.0035 or -0.51% and the NZD/USD finished at .6350, down 0.0036 or -0.56%.

Geopolitical Influences

Early in the week, fresh Brexit worries pressured the Aussie and Kiwi. The new concerns were raised after U.K. Prime Minister Boris Johnson was thwarted by a cross-party group of politicians in Parliament who voted to postpone the “meaningful vote” on his new Brexit deal. Later in the week, U.K. lawmakers voted to reject a limited time frame for reviewing legislation related to Britain’s withdrawal from the EU.

It now means that the U.K. is almost certainly not going to leave the U.K. on October 31 – the current deadline, and the EU may provide an extension to prevent a no-deal occurring.

Offsetting the fresh concerns over Brexit was an improvement in investor sentiment around ongoing negotiations between the United States and China.

Australian Dollar

The Australian Dollar started the week higher, but a reversal to the downside on October 22 ignited a three day sell-off.

“The AUD is now likely to be driven more by the domestic economic outlook and relative monetary policy trends and less by the global risk factors such as equities. Our expectations are for the RBA to remain dovish but we also expect a deep cutting cycle from the Fed,” says Vassili Serebriakov, a strategist at UBS, in a research note.

New Zealand Dollar

For weeks, the New Zealand Dollar traded higher as investors increased bets on a U.S. Federal Reserve rate cut at the end of October. However, expectations of another rate cut in December likely means the RBNZ will be forced to cut rates in November in order to protect the economy by keeping the Kiwi weak.

The Fed’s next meeting is on October 29-30 and investors have almost priced in a 25-basis point cut in the Fed Funds Rate to between 1.5 percent and 1.75 percent.

The markets have also fully priced in a 25 basis point rate cut to 0.75 percent by the Reserve Bank of New Zealand when its monetary policy committee next meets on November 13 but are pushing out further cuts.

Weekly Forecast

For Aussie traders, the week starts early Tuesday when RBA Governor Philip Lowe speaks at 06:45 GMT. Traders are hoping he sheds some light on the central bank’s plan on interest rates. The RBA last cut rates on October 1, taking its cash rate to 0.75 percent, and financial market traders don’t expect another cut this year.

Martin Rudings, private client manager at OMF says, “The jury’s certainly not 100 percent convinced there will be more, and rightly so. When you get down to this low, it’s hard to see what you’re going to achieve by making further cuts.”

Early Wednesday, investors will get the opportunity to react to Australian CPI and Trimmed Mean CPI reports. Early Thursday, it’s Building Approvals that could influence the trade.

For New Zealand Dollar traders, Thursday’s ANZ Business Confidence report is likely to be a market mover.

This week should be a busy week for U.S. Dollar traders because of geopolitical factors, economic news and central bank activity.

The geopolitical factors driving the price action will be Brexit and trade relations between the U.S and China. Both economic powerhouses may even announce an agreement on phase one of their current partial trade deal.

Traders will also get the chance to react to Consumer Confidence data on Tuesday; the ADP Non-Farm Employment Change and the Advance GDP on Wednesday; Personal Spending on Thursday; and the U.S. Non-Farm Payrolls report and ISM Manufacturing PMI report on Friday.

The major event will be the Fed’s interest rate decision and release of its latest monetary policy statement on Wednesday. Traders have priced in a 25-basis point rate cut for weeks so it should be no surprise if they do cut. The surprise will be if they don’t cut. Traders will likely be focusing on comments about the possibility of another cut in December.