AUD/USD and NZD/USD Fundamental Weekly Forecast – RBA Expected to Address Fate of Bond Purchase Program

The Australian and New Zealand Dollars closed lower last week, however, a dramatic closing price reversal bottom on Friday in both currencies may be signaling a short-term bottom. The Aussie and the Kiwi were supported late in the week by some of the weaker details of what was otherwise an overall strong U.S. Non-Farm Payrolls report for June. The headline jobs number beat the estimate, but the report also showed a slight increase in the unemployment rate.

Last week, the AUD/USD settled at .7526, down 0.0067 or -0.88% and the NZD/USD finished at .7031, down 0.0039 or -0.54%.

Data showed that U.S. non-farm payrolls did beat expectations, increasing by 850,000 jobs last month after rising 583,000 in May. But the unemployment rate rose to 5.9% from5.8% in May, while the closely-watched average hourly earnings, a gauge of wage inflation, rose 0.3% last month, lower than the consensus forecast for a 0.4% increase.

The Aussie and the Kiwi were likely lifted because the mixed bag of U.S. labor data dampened fears about a faster end to the Fed’s monetary stimulus. While the headline number exceeded expectations, the unemployment rate ticked higher, suggesting positive progress, but space for the Federal Reserve to wait before tapering asset buying or hiking rates.

The news drove down Treasury yields, making the U.S. Dollar a less-desirable investment and driving up demand for the risk-sensitive Australian and New Zealand Dollars.

The focus now shifts to Tuesday’s Reserve Bank of Australia (RBA) interest rate and monetary policy decision.

Weekly Forecast

The trade in the Australian and New Zealand Dollars is likely to be tense ahead of an Australian central bank policy meeting on Tuesday at 04:30 GMT which could see a course change in its massive stimulus program.

The Reserve Bank of Australia (RBA) is expected to tinker with its own stimulus program at its policy meeting, but likely remain doggedly dovish overall given the latest spate of coronavirus lockdowns in the country.

“The COVID developments since the board last met suggest a dovish tone from this week’s board meeting despite a likely shift away from extreme policy settings,” said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.

Ong, like most of the market, assume the central bank will not shift its three-year bond target to November 2024, from the current April 2024 line, but will announce another round of bond buying in some form or other.

The market has already priced for no extension in the yield curve target with the September three-year bond future trading 99.585, compared with the June contract’s close of 99.846.

Investors have also priced in a risk of a first rate hike by late 2022, while the RBA has been saying a move was unlikely before 2024. If the central bank were to drop 2024 from its statement, that would be taken as a green light for an earlier hike.