AUD/USD and NZD/USD Fundamental Weekly Forecast – Pressured by Rising U.S. Treasury Yields, Domestic Concerns

The tone changed from short-term bullish to short-term bearish last week when U.S. Treasury yields started to rise. This helped make the U.S. Dollar a more attractive investment. Yields are being boosted by increased demand for risky assets tied to the optimism over the positive developments in the trade talks between the United States and China.
James Hyerczyk
AUD/USD and NZD/USD

The Australian and New Zealand Dollars closed lower last week as the bullish start to the new year came to a screeching halt. The fundamentals and the price action indicates the reason behind the weakness was the stronger U.S. Dollar. The strength in the dollar was fueled by rising Treasury yields. Surprisingly, the optimism over U.S.-China trade negotiations failed to generate a rally in the Aussie and the Kiwi although it did dampen the selling pressure against the Australian Dollar.

Last week, the AUD/USD settled at .7165, down 0.0051 or -0.70% and the NZD/USD closed at .6744, down 0.0090 or -1.31%.

Last week’s price action indicates that the recent rallies are losing steam as investors begin to realize that the outlook for the U.S. economy is optimistic and the outlook for the Australian and New Zealand economies is pessimistic. Concerns over Brexit and worries over the local economy also helped put a lid on the recent strength.

Last week there were no major reports from Australia and New Zealand. In the U.S., the Producer Price Index fell 0.2%, more than expected. This confirmed the Fed’s assessment of muted inflation. It also supported the Fed’s plan to take a pause in raising rates although the market now seems to think that a trade deal will put the central bank back on track to tighten further.

Forecast

The tone changed from short-term bullish to short-term bearish last week when U.S. Treasury yields started to rise. This helped make the U.S. Dollar a more attractive investment. Yields are being boosted by increased demand for risky assets tied to the optimism over the positive developments in the trade talks between the United States and China.

Fueling the strength in Treasury yields was a report from CNBC that China had offered a six-year increase in U.S. imports during recent trade talks. Bloomberg News also reported on Friday that the deal would aim to reduce the annual U.S. trade deficit to zero by 2024.

On Thursday, it was reported that Treasury Secretary Steven Mnuchin was considering the idea of easing tariffs on Chinese goods as a means of moving along the negotiations for a new trade deal. The reaction to this news was cautious, however, because the report was refuted by a senior administration official who told CNBC that there is “no discussion of lifting tariffs now.”

In New Zealand, prospects for a flat fourth-quarter CPI figure this week, and the risks that Reserve Bank changes to bank capital requirements may slow growth are weighing on the Kiwi.

In Australia, investors will get the opportunity to react to the Employment Change and the Unemployment Rate.

After an initial reaction to the reports from New Zealand and Australia, traders are going to focus on U.S. Treasury yields. Look for the Aussie and Kiwi to continue to weaken if yields rise in anticipation of more positive developments in U.S.-China trade relations.  Weak domestic data will also weigh on the currencies.

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