AUD/USD and NZD/USD Fundamental Weekly Forecast – Short-Covering Rallies Will Last Until Weakest Short is Taken Out

The Australian and New Zealand Dollar soared last week on aggressive short-covering, fueled by greater demand for risky assets. A combination of events encouraged short-sellers to take profits following a prolonged multi-week sell-off. This initial turnaround was enough to spoke other short-sellers out of the market. Some of the events driving the price action were an easing of tensions over Brexit, positive steps toward ending the violence in Hong Kong, the announcement of renewed trade talks between the United States and China, and better than expected services data from China.

Last week, the AUD/USD settled at .6850, up 0.0113 or 1.68% and the NZD/USD finished at .6428, up 0.0117 or +1.86%. Both moves were good enough to produce potentially bullish closing price reversal bottom technical chart patterns.

Also contributing to the turnaround in the Aussie and Kiwi was a bearish ISM US Manufacturing PMI report that showed a contraction in the sector for the first time since 2016. However, this may have been offset somewhat by Friday’s mixed U.S. Non-Farm Payrolls report, and positive comments from Federal Reserve Chairman Jerome Powell.

Easing of Tensions over Brexit

Demand for risky assets like the Aussie and Kiwi was driven last week by hopes for a Brexit delay. The news that British lawmakers voted to take control of the parliamentary agenda in a bid to pass legislation to prevent a no-deal Brexit was the catalyst behind the moves. There are still issues to overcome, but the result creates an opportunity for compromise.

Tensions Ease in Hong Kong

The Japanese Yen fell on Wednesday following reports that a controversial extradition bill is set to be withdrawn. However, this may only be a temporary reprieve from the violence that has plagued the region for months.

U.S.-China Resume Trade Talks

The Dollar/Yen rally actually began on August 26 with the formation of a dramatic reversal bottom at 104.463. The move was triggered when President Trump said China wanted to resume trade talks. Although the press didn’t believe Trump because China failed to verify the comment at the time, his remarks proved to be true with China announcing the resumption of trade talks last week. This reduced the Japanese Yen’s appeal as a safe-haven asset.

China’s Ministry of Commerce said on September 5 that the leaders of the U.S. and Chinese trade talks held a phone call in the morning and agreed to meet in early October for another round of negotiations.

China Services PMI Impressive

Demand for safe-haven assets like the Yen fell and stocks soared on Wednesday after the release of a report that showed the Caixin/Markit Services Purchasing Managers’ Index came in at 52.1 in August, its highest since May. The 50-mark in PMI readings separates growth and contraction. Official data for August released over the weekend showed services sector activity picking up for the first time in five months in August.

Weak Manufacturing Data Bearish for U.S. Dollar

A closely watch report from the Institute for Supply Management showed that manufacturing activity in the world’s biggest economy contracted for the first time in three years last month. This news helped weaken the Greenback because it increased the chances of a future U.S. recession.

U.S. Non-Farm Payrolls Mixed, but Fed Chair Powell Optimistic About Economy

The U.S Labor Department said private and public employers hired 130,000 workers in July, fewer than the 158,000 forecast among economists polled by Reuters, while hourly wages grew 0.4% last month, a little faster than the 0.3% increase projected by analysts.

Aussie and Kiwi traders shrugged off the mixed U.S. Non-Farm Payrolls report released earlier in the session. Fed Chair Jerome Powell who said the central bank’s pivot this year to lower interest rates has helped sustain U.S. economic growth, helped to support demand for risky stocks and currencies.

“The Fed has through the course of the year seen fit to lower the expected path of interest rates,” he said. “That has supported the economy. That is one of the reasons why the outlook is still a favorable one.”

Weekly Forecast

The short-covering rallies by the AUD/USD and NZD/USD have been impressive, but they are just “short-covering rallies”. They are not expected to last and may not even lead to a change in trend. They are primarily designed to alleviate the oversold conditions.

The Fed is expected to cut rates at its September 18 policy meeting, and the Reserve Banks of Australia (RBA) and New Zealand (RBNZ) are expected to cut rates at least one more time before the end of the year, so there is nothing bullish about the Aussie and Kiwi to speak of.

Like any short-covering rally, the move will last until the weakest short is driven out of the market.

There are no major reports from Australia and New Zealand this week with most eyes focused on the European Central Bank’s (ECB) interest rate decision on Thursday. The ECB is expected to be aggressive, which should drive up the U.S. Dollar.

Increased demand for risk is likely to continue to be the main driver of bullish price action. Rising interest rates will also be supportive for the U.S. Dollar.

We’re not expecting too much of a reaction to Thursday’s U.S. Consumer Inflation Report (CPI) since a 25-basis point rate cut by the Fed later in the month has already been priced into the market. Traders are looking for a 0.1% increase. Core CPI is expected to have risen 0.2%.

U.S. Retail Sales could generate a bigger reaction by Aussie and Kiwi traders since U.S. consumers have kept the economy afloat lately. Core Retail Sales are expected to have risen 0.1% and Retail Sales by 0.2%.