AUD/USD and NZD/USD Fundamental Weekly Forecast – Investors Betting RBA, RBNZ Tighten Before Fed

The Australian and New Zealand Dollars finished higher last week as investors continued to adjust positions following the previous week’s steep sell-off. The price action suggests investors believe that sharp break was overdone and likely fueled by sell stops and long-liquidation rather than aggressive short-selling.

Traders also likely increased bets on which central bank would be the first to raise interest rates. Last week’s commentary from Federal Reserve Chairman Jerome Powell probably contributed to the rally because he played down the possibility of an early rate hike by the Fed. Several Fed members disagreed with Powell’s assessment of inflation and the timing of the next rate hike, but Aussie and Kiwi traders should a muted reaction to those remarks.

Last week, the AUD/USD settled at .7593, up 0.0114 or +1.52% and the NZD/USD closed at .7070, up 0.0139 or +2.01%.

Aussie, Kiwi Traders React Positively to Powell’s Dovish Spin on Inflation, Interest Rates

Early last week, Federal Reserve Chair Jerome Powell said in prepared testimony for a congressional hearing that the U.S. economy continues to show “sustained improvement” from the impact of the coronavirus pandemic and ongoing job market gains, but inflation has “increased notably in recent months.”

Powell did not go into detail in his prepared remarks on current monetary policy, or the possibility the U.S. central bank may have to speed up it plans to pull back on some support for the economy because of the faster rise in prices.

In his remarks, Powell said he regards the current jump in inflation, in fact, as likely to fade.

“We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances,” Powell said in a hearing before a House of Representatives panel.

New Zealand Economy Continues to Improve

The New Zealand trade balance expanded to NZ$469 million last month, well above the NZ$205 million estimate, according to Statistics New Zealand. The figure was also up from the upwardly revised NZ$414 million surplus in April (originally NZ$388 million).

Weekly Forecast

Looking ahead to this week, the focus will be on Friday’s U.S. Non-Farm Payrolls report. With inflation likely to peak shortly, the Fed would like to see more improvement in the U.S. labor market as it hopes to eventually recover all of the jobs lost during the pandemic.

The labor market is also a major concern in Australia. Absorbing spare labor market capacity and achieving full employment are important national priorities, a senior Australian central bank official said on Wednesday, reiterating the bank’s commitment to supportive monetary policy.

In the last report, Australia’s labor market surpassed all expectations with the unemployment rate sliding to pre-pandemic levels of 5.1%. The RBA estimates that the rate will likely need to be around 4% to generate wage and inflation pressures.

Aussie traders are also looking ahead to the RBA’s policy meeting on July 6, where it is expected to announce a reduction in bond purchases.