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AUD/USD and NZD/USD Fundamental Weekly Forecast – RBA May Pass on Rate Cut, RBNZ Will Cut

Even though the United States weakened against most major currencies late in the week, the commodity-linked Australian and New Zealand Dollars continued to be pressured by low demand for risky assets and expectations of additional rate cuts by the Reserve Bank of Australia and Reserve Bank of New Zealand in October and August, respectively.
James Hyerczyk
AUD/USD and NZD/USD

The Australian and New Zealand Dollars finished lower last week, pressured by a combination of U.S. central bank activity, new tariffs on China and worries about the domestic economy.

In the U.S., the Fed cut rates as expected, but Fed Chair Jerome Powell failed to signal that additional rate cuts were coming in September and December. This put pressure on the Aussie and Kiwi. Another blow was dealt to the currencies when President Trump announced the United States would hit China with additional tariffs on September 1.

Even though the United States weakened against most major currencies late in the week, the commodity-linked Australian and New Zealand Dollars continued to be pressured by low demand for risky assets and expectations of additional rate cuts by the Reserve Bank of Australia and Reserve Bank of New Zealand in October and August, respectively.

Last week, the AUD/USD settled at .6801, down 0.0110 or -1.60% and the NZD/USD finished at .6536, down 0.0103 or -1.55%.

Australian Dollar

Australian Dollar investors actually received some good news for a change last week, but the new tariffs against China erased their positive impact.

A jump in fuel prices and medical costs helped bolster Australian consumer inflation over the June quarter, easing the pressure on the Reserve Bank to cut interest rates at its August 6 policy meeting.

The Consumer Price Index (CPI) rose 0.6 percent over the quarter to be up 1.6 percent for the year. Core inflation came in at 1.4 percent over the year, the same as the first quarter reading and the weakest reading since the series started in 2003.

Australian Retail Sales came in higher-than-expected at 0.4%, beating the 0.3% forecast

The decent economic data didn’t impress traders, however, as the Australian Dollar continued to tumble in response to an escalation in trade tensions between the U.S. and China. The additional tariffs and the threat of even more to come raised concerns about the impact on the country’s vast manufacturing sector, and potentially China’s demand for raw materials like coal and iron ore.

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New Zealand Dollar

The Kiwi was hit on three fronts last week. Firstly, traders expect the Reserve Bank of New Zealand to cut its benchmark interest rate 25-basis points on August 6. Secondly, as a commodity-linked currency, it’s closely aligned with the performance of the global economy, especially China. Thirdly, the New Zealand Dollar is also considered a higher-yielding assets. Demand for higher risk plummeted last week with most investors seeking shelter in the safe-haven Japanese Yen.

On the economic front, ANZ Business Confidence plunged to -44.3 from -38.1. This drop represents an ever-deepening pessimism, particularly in the construction sector. It also has people starting to talk about job security. It will be the RBNZ’s job to stop any weakness in employment in its tracks.

Weekly Forecast

Central bank activity will dominate the trade in the Aussie and Kiwi this week.

On Tuesday, Reserve Bank of Australia (RBA) board members will be going into this month’s policy meeting “hot”, meaning they can raise rates at any time. However, on August 6, they are expected to pass on a rate cut, leaving the benchmark at a historically low 1.00%. The RBA cut in June and July.

Look for RBA Governor Philip Lowe to reiterate his concerns about the weakening global economy and domestic labor market. He’s also likely to repeat that interest rates will remain low for a long time.

It would be a “mild” surprise if the RBA cut.

On Wednesday, the Reserve Bank of New Zealand (RBNZ) is widely expected to cut its benchmark interest rate to 1.25%. It last cut in June.

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