AUD/USD and NZD/USD Fundamental Weekly Forecast – Investors Eyeing Risk Sentiment for Direction

The Australian and New Zealand Dollars finished lower last week in a volatile trade with the choppy price action fueled by a number of factors including domestic central bank comments, hawkish U.S. Federal Reserve remarks and two-sided risk sentiment.

Last week the AUD/USD settled at .7261, down 0.0003 or -0.04% and the NZD/USD closed at .7014, down 0.0021 or -0.29%.

Australia’s Central Bank Wary in Case Delta Slows Recovery

The Reserve Bank of Australia (RBA) is concerned the spread of the Delta variant could slow the economy’s recovery once coronavirus lockdowns start to ease, although it still expects strong growth to resume next year, Reuters reported.

Minutes of the RBA’s September policy meeting showed the Board considered delaying a planned A$1 billion ($727 million) tapering of tis bond-buying program to A$4 billion a week.

In the end, it decided to press ahead but agreed to maintain bond buying at that level until at least February before considering a further reduction, allowing time to gauge the recovery.

“The economy was expected to bounce back as vaccination rates increase ad restrictions are eased,” the minutes showed.

“However, there was considerable uncertainty about the timing and pace of the recovery, which was likely to be slower than experienced earlier in 2021.”

RBNZ Comments Dampen Market Expectations of a Big Rate Hike

New Zealand’s central bank dampened expectations of a big interest rate hike when it meets next month, with comments last Tuesday that indicated it may take a more cautious approach.

The Reserve Bank of New Zealand (RBNZ) Assistant Governor Christian Hawkesby said in a speech that amid uncertainty, when the risks are evenly balanced,” central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25 basis point increments.”

The RBNZ stressed today that in times of uncertainty, a measured policy approach is appropriate…, ANZ Bank Chief Economist Sharon Zollner said in a statement.

“We never thought a 50 bp move was a likely start to the hiking cycle; this confirms it. Our OCR forecast is unchanged, with 25 bp hikes to come in October and November, with steady hikes thereafter taking the OCR to 1.5% by August next year,” she said.

Federal Reserve Holds Interest Rates Steady, Says Tapering of Bond Buying Coming ‘Soon’

Last Wednesday, the Federal Reserve said it would reduce its monthly bond purchases “soon” and half of the Fed’s policymakers projected borrowing costs will need to rise in 2022. The news send U.S. Treasury yields higher, making the U.S. Dollar a more attractive investment.

Risk Sentiment Goes for a Ride

Throughout the week, risk sentiment swung widely in both directions, taking its toll on the Aussie and Kiwi at times. The currencies were dragged down by broad losses in global equity markets as investors fretted over the impact of a missed bond interest payment by debt-laden developer China Evergrande.

Weekly Forecast

The China Evergrande problems are not expected to go away so bearish risk sentiment could continue to weigh on the AUD/USD and NZD/USD. Local officials described the signals from Chinese authorities as “getting ready for the possible storm” and said the government told them they should only step in at the last minute to prevent spillover effects from Evergrande’s demise, the Wall Street Journal said.

One highlight for the week is the number of Federal Open Market Committee (FOMC) speakers. Their comments on the timing of Fed tapering could be another source of volatility.

Stronger commodity and stock prices could help ease the expected downward pressure.