AUD/USD and NZD/USD Fundamental Weekly Forecast – RBNZ Rate Decision Expected to Trigger Volatile Response

The price action in the AUD/USD and NZD/USD suggests traders are starting to price in further rate cuts by the RBA and RBNZ, despite the optimistic developments over the trade deal. Furthermore, rising Treasury yields point toward increasing expectations of an improving U.S. economy. Yields are nearing highs not seen since August 1.
James Hyerczyk

The Australian and New Zealand Dollars finished lower last week as a sharp rise in U.S. Treasury yields helped make the U.S. Dollar a more attractive investment. Traders also downplayed the positive developments over a U.S.-China trade deal, choosing instead to focus on economic news, central bank comments and renewed talk of further rate cuts by the Reserve Bank of Australia and the Reserve Bank of New Zealand.

Last week, the AUD/USD settled at .6859, down 0.0054 or -0.78% and the NZD/USD closed at .6327, down 0.0101 or -1.57%.

Australian Dollar

RBA Interest Rate Decision

The Reserve Bank of Australia (RBA) held interest rates at the historic low of 0.75 percent on November 5. The decision to pause after the October cut was largely expected given a marginal improvement in unemployment and a modest uptick in inflation.

RBA Governor Philip Lowe noted in his post-decision statement the outlook for the Australian economy is little changed from three months ago.

“The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth,” Dr. Lowe said.

“The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending.”

“The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range,” Dr. Lowe said.

“Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target.”

RBA Statement on Monetary Policy (SoMP)

The RBA’s latest forecasts in the SoMP, released on Friday, showed Australian inflation is no longer expected to reach the lower bound of the 2%-to-3% inflation target within the forecast period, which is December 2021. Furthermore, forecasts for growth were also reduced with Australia GDP expected to return to trend (2.74%) in December 2020, six months later than previously projected.

New Zealand Dollar

The NZD/USD hit a three week low after weaker-than-expected economic data increased the chances of a Reserve Bank of New Zealand (RBNZ) rate on November 13.

New Zealand’s seasonally adjusted unemployment rate rose to 4.2% in the September quarter, up from 3.9% last quarter, according to data from Statistics New Zealand.

The weak jobs data is causing problems for NZD/USD traders because the majority of economists expect the RBNZ to cut the official cash rate to a fresh record low of 0.75% on November 13, while traders are less certain. The financial markets now see a 64% chance of a cut, up from 56% earlier Wednesday but down from 100% last month.

Weekly Forecast

The price action in the AUD/USD and NZD/USD suggests traders are starting to price in further rate cuts by the RBA and RBNZ, despite the optimistic developments over the trade deal. Furthermore, rising Treasury yields point toward increasing expectations of an improving U.S. economy. Yields are nearing highs not seen since August 1.

This week, Aussie Dollar traders will get the opportunity to react to the Wage Price Index and the Employment Change and Unemployment Rate reports. All three reports should determine the RBA’s next move on interest rates.

Kiwi traders will be reacting to the RBA interest rate decision and policy statement. This is a tough call for traders because just last week, the financial markets were neutral about a rate cut, and now they are leaning toward one.

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