AUD/USD and NZD/USD Fundamental Weekly Forecast – Vulnerable to Hawkish Fed Policy Announcements

The Australian and New Zealand Dollars finished higher last week. The strength was fueled by the Aussie which outperformed the Kiwi by a more than 3-to-1 margin. Boosting the Australian currency was its central bank which last week painted a rosier economic outlook in its last monetary policy meeting of the year.

Last week, the AUD/USD settled at .7172, up 0.0172 or +2.45% and the NZD/USD finished at .6798, up 0.0051 or +0.76%. The Invesco CurrencyShares Australian Dollar Trust (FXA) ended the week at $71.15, up $1.62 or +2.33%.

Reserve Bank of Australia Sees Recovery on Track

Supporting the Australian Dollar were comments from the Reserve Bank (RBA) which indicated the Omicron variant outbreak was unlikely to derail the current financial recovery. Meanwhile some analysts saw hints it may raise rates sooner than expected.

The RBA left its cash rate at a record low, in line with market expectations. It also stuck with its bond buying plans, resisting pressure to follow its U.S. counterpart in signaling an earlier winding down of stimulus.

However analysts said subtle changes in language – removing a reference to inflation sitting in the bank’s target by late 2023 – suggest the bank is giving itself room to move a little sooner.

Aussie, Kiwi Underpinned by China Economic Data, Strong Yuan

Better China trade data also underpinned the Australian and New Zealand Dollars. Data showed China’s exports and imports rose more than expected in November as the world’s second-biggest economy scrambled to restock key commodities like coal.

The Aussie and Kiwi benefited from improving global risk sentiment on Thursday as investors counted on Omicron being “mild”, while a surge in the Chinese Yuan provided an extra tailwind.

Another supporting factor was the recent run of upbeat trade data from China, along with stimulus steps from Beijing to underpin the economy and the property sector. The market responded by pushing the Yuan to a three-year high on the U.S. dollar, lifting the Aussie and Kiwi as investors use it as a liquid proxy for the Chinese currency.

Weekly Forecast

Friday’s U.S. inflation data has likely overridden the sentiment from the RBA. The hot readout from the world’s largest economy will likely push a hawkish tone from the Federal Reserve in the form of a speedier stimulus tapering.

The AUD/USD and NZD/USD could get hit hard this week if the Fed is receptive to ending its tapering plans by March 31. This would open the door to a rate hike as early as April 2022. As of Friday, the market was pricing in a June 2022 first Fed rate hike.

The Aussie and Kiwi could feel even more pressure if the Fed turns “hot”, meaning it could raise rates at any future central bank meeting.