AUD/USD and NZD/USD Fundamental Weekly Forecast – US-China Trade Progress, U.S. Treasury Yields Big Influences This Week

The Australian and New Zealand Dollars posted solid gains last week despite giving back some of those gains late in the week. Strong domestic data and a dovish U.S. Federal Reserve were supportive early in the week. Optimism over the outcome of U.S.-China trade talks also helped generate some buying interest. However, robust U.S. jobs data and factory activity on Friday, drove up Treasury yields, making the U.S. Dollar a more attractive asset.

Last week, the AUD/USD settled at .7247, up 0.0069 or +0.96% and the NZD/USD finished at .6893, up 0.0052 or +0.76%.

Aussie Headline CPI Beats Forecast, but Core Misses RBA Target Band

Australian consumer inflation beat forecasts last quarter, but core inflation ended 2018 below the central bank’s target band. This reaffirmed the view that interest rates will remain at record lows over the long-run.

The headline consumer price index (CPI) rose 0.5 percent in the December quarter, surpassing forecasts for a 0.4 percent increase.

“Annual CPI inflation ran at 1.8 percent, again beating estimates. Key measures of underlying inflation favored by the Reserve Bank of Australia (RBA) averaged around 1.75 percent for the year, in-line with forecast,” according to Reuters.

Reuters also reported that “core inflation has now undershot the RBA’s long-term target band of 2 percent to 3 percent for 12 straight quarters, the longest stretch since the series began.”

NZ Annual Trade Deficit Rises

According to the press release from Statistics New Zealand, “fuel imports rose sharply last year, driving up the annual trade deficit to $5.9 billion for the December 2018 year.”

“The trade deficit for 2018 is the largest annual trade deficit since the October 2007 year. The largest deficit is equal to 10 percent of exports, compared with 17 percent in the October 2007 year.

Both imports and exports were up for the December year, but the deficit has widened because imports have risen more. Annual imports for the year ended December 2018 reached a new high of $63.4 billion, up $6.9 billion (12 percent) from 2017.

NZ December 2018 Trade Balance

The monthly trade balance was a surplus of $264 million (4.8 percent of exports). In December 2017 there was a surplus of $614 million.

For the December 2018 month, imports were up $323 million (6.6 percent) to $5.2 billion.  Exports were little changed, down $27 million (0.5 percent) to $5.5 billion compared with December 2017.

Dovish Fed Spikes Aussie, Kiwi Higher

The Aussie and Kiwi strengthened last week shortly after the Fed left its benchmark interest rate unchanged as expected while delivering a dovish message in its monetary policy statement. Fed Chair Jerome Powell further fanned the dovish flames.

The Federal Reserve said it will be “patient” when making decisions about future monetary policy. The central bank also removed reference to “further gradual increases” to the federal funds rate in its statement, a signal Aussie and Kiwi traders took to mean that it may slow the pace of interest rate increases in 2019.

The Fed also left the benchmark overnight lending rate unchanged between a range of 2.25 percent and 2.5 percent at their January meeting. This move was widely expected.

Commodity-Linked Currency Demand on US-China Trade Optimism

The AUD/USD and NZD/USD hit their highs of the week as investors sought riskier currencies amid optimism the United States and China may reach a trade deal. The move was fueled by upbeat comments from President Trump. He said on Thursday he will meet with Chinese President Xi Jinping soon to try to seal a comprehensive trader deal as the top U.S. negotiator reported “substantial progress” in two days of high-level talks.

NZ Boosted by S&P Upgrade

“Global ratings agency Standard & Poor’s has affirmed New Zealand’s ‘AA” sovereign credit rating, saying the new government’s plans to lift spending will be a bigger contributor to growth in the future, but are funded through cancelled tax cuts and won’t undermine the outlook. “

“The ratings agency yesterday affirmed the ‘AA’ foreign currency and ‘AA+’ local currency long-term sovereign credit ratings for New Zealand and maintained a stable outlook, saying the nation benefited from its flexible fiscal and monetary policies, resilient economy and stable public policies. S&P anticipates real economic growth of 2.8 percent between 2018 and 2020 driven by cheap credit, a larger population and increased government spending, with consumer spending and business investment likely to stay firm.”

U.S. Dollar Supported by Robust U.S. Jobs Report, Factory Data

The AUD/USD and NZD/USD lost ground at the end of the week, but remained higher for the week.  Prices were pressured by a combination of a robust payrolls report and strong manufacturing data from the U.S.

Weekly Forecast

This week, AUD/USD and NZD/USD investors are likely to continue to monitor the progress of U.S.-China trade talks. Positive developments should be supportive. We could see pressure from Friday’s blowout jobs report. If this news continues to drive Treasury yields higher, then look for the U.S. Dollar to become a more desirable investment.

The overall direction of the AUD/USD and NZD/USD this week will once again be determined by Treasury yields and investor appetite for risk. Traders will also keep an eye on economic data from China in light of the weakening economy.

The main influence on the Australian and New Zealand Dollars over the mid-term will be the dovish Fed policy. This could provide some support. However, over the short-run we are going to see periodic price adjustments in reaction to U.S. economic data.

Bullish economic data will increase the chances of a Fed rate hike so this could provide resistance for the AUD/USD and NZD/USD.

This week’s major report is ISM Non-Manufacturing PMI. It is expected to come in at 57.0, slightly below the previously reported 57.6. Given Friday’s blowout ISM Manufacturing PMI data, I wouldn’t be surprised if this number beats the forecast.

Fed Chairman Jerome Powell is scheduled to speak on Wednesday night. He’s actually in a tough position because the labor market data points toward a strong economy after he told investors last Wednesday that the case for rate increases had “weakened” in recent weeks.