AUD/USD and NZD/USD Fundamental Weekly Forecast – US Economic Data, Powell’s Testimony Sets the Tone

The Australian and New Zealand Dollars finished sharply lower last week after the U.S. Federal Reserve surprised investors by shifting policy from dovish to hawkish. Domestically, the Reserve Bank of Australia (RBA) minutes showed central bankers weren’t being swayed by a strengthening economy and maintained its dovish tone. Economic data out of New Zealand also failed to attract enough buyers to offset the stronger U.S. Dollar. Essentially, rising Treasury yields made the greenback a more attractive investment than the Aussie and Kiwi.

Last week, the AUD/USD settled at .7480, down 0.0233 or -2.90% and the NZD/USD finished at .6930, down 0.0197 or -2.77%.

Australia’s Central Bank Says ‘Premature’ to End Bond Buying Program

Australia’s central bank signaled last Tuesday its willingness to extend its bond purchase program next month and laid out various options for the plan with the aim of meeting its goals of boosting employment and inflation.

Minutes of the Reserve Bank of Australia’s (RBA) laid out how it might revise its bond buying campaign. A final decision is due at its meeting on July 6. Whatever the RBA decides about the bond purchase program, analysts expect it to keep the policy cash rate at a record low 0.1% for a long time to come.

“Observing that the bond purchase program had been one of the factors underpinning the accommodative conditions necessary for the economic recovery, members thought it would be premature to consider ceasing the program,” minutes of its June policy meeting showed.

New Zealand Economy Surges as Housing, Retail Drive Post-COVID Recovery

New Zealand’s economic growth swept past forecasts in the first quarter on the back of a housing boom and strong retail spending, avoiding a second recession and bringing forward expectations for tighter monetary policy.

Gross Domestic product (GDP) rose 1.6% in the three months through to March, Statistics New Zealand said last Thursday, well ahead of a Reuters poll forecast of 0.5% growth and the Reserve Bank of New Zealand’s (RBNZ) estimate of a 0.6% fall.

Federal Reserve Moves Up Its Timeline for Rate Hikes on Inflation Concerns

The Federal Reserve last Wednesday considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates, CNBC reported.

However, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program, though Fed Chairman Jerome Powell acknowledged that officials discussed the issue at the meeting.

Weekly Forecast

Last week’s sell-off by the AUD/USD and NZD/USD may have been overdone, but we won’t know until we see trader reaction to the U.S. economic reports. Moving forward, it’s going to be all about the U.S. economic data confirming the Fed’s assessment of the strength of the economy.

Meanwhile in Australia, traders have about two weeks to figure out the RBA’s next move. Investors will be watching communications out of the central bank in the weeks ahead, starting with a speech from Governor Philip Lowe on Thursday. Assistant Governor Luci Ellis speaks at a conference on June 23 followed by a panel participation by Lowe on June 30.

Regarding the New Zealand Dollar, ANZ Bank said it was bringing forward its forecast for the central bank to hike its official cash rate to February 2022, saying “a year from now feels too far away”.

Last week’s sell-off may have been a little too much so don’t be surprised by a small rebound especially if U.S. Flash Manufacturing PMI or Flash Services PMI comes in lower-than-expected.

Traders will also be watching Fed Chair Jerome Powell’s testimony on Tuesday. He can trigger another sharp break if he comes across as hawkish.