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AUD/USD and NZD/USD Fundamental Weekly Forecast – Will Trade Dispute Escalate in Reaction to Record China Trade Surplus?

This week’s price action is likely to be tied to risk appetite, trade tensions, domestic data and Fed Chairman Powell’s testimony before Congress.
James Hyerczyk
AUD/USD and NZD/USD
AUD/USD and NZD/USD

The Australian and New Zealand Dollars finished lower last week against the U.S. Dollar. However, the Aussie outperformed the Kiwi as investors responded stronger to increased demand for risky assets.

The AUD/USD settled the week at .7425, down 0.0002 or -0.03% and the NZD/USD closed at .6767, down 0.0071 or -1.04%.

Last week’s price action was driven by the announcement of potentially new tariffs against China by the United States, and strong U.S. producer and consumer inflation that likely kept the Fed on track for at least two more rate hikes this year.

Trade Tariff Concerns

The Trump Administration said last Tuesday it was looking into imposing tariffs on $200 billion more in Chinese imports. Beijing then vowed to retaliate. On Thursday, U.S. Treasury Secretary Steven Mnuchin said that the United States and China might reopen trade talks, briefly easing concerns about the trade dispute.

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U.S. Economic Data/Fed Talk

On Wednesday, U.S. government data showed U.S. producers prices increased more than expected in June amid gains in the cost of services and motor vehicles, leading to the biggest annual increase in 6-1/2 years.

On Thursday, consumer prices rose in June at the highest yearly rate since 2012, reflecting a U.S. economy that’s running hotter than any time since the Great Recession.

On Friday, the University of Michigan said consumer sentiment hit a six-month low, but held near the average print for the prior 12 months.

U.S. Federal Reserve Chairman Jerome Powell said in an interview last week that he believed “the economy’s in a really good place” at the moment with unemployment at the lowest point in nearly two decades and inflation finally approaching the Fed’s optimal goal of 2 percent annual increases.

Powell also added he was “very pleased with the results” of the Fed’s gradual pace of rate hikes.

Forecast

This week’s price action is likely to be tied to risk appetite, trade tensions, domestic data and Fed Chairman Powell’s testimony before Congress.

Increasing appetite for risky assets could continue to underpin the Aussie and Kiwi this week, or prevent them from completely breaking down. However, this is only a mild, short-term factor. Both remain very bearish due to the divergence between the central bank policies of the Fed and the RBA and RBNZ.

Although tensions between the U.S. and China seemed to ease a bit last week, they could come back into focus this week with a vengeance because of the news of a record Chinese trade surplus. Trump may decide to up the ante because it appears his initial tariffs have had little impact on the surplus that China is running. This could put renewed pressure on the Australian and New Zealand Dollars as investors shift money into the safe-haven U.S. Dollar.

On the domestic front, New Zealand will release data on consumer inflation. In Australia, the RBA will release its Monetary Policy Meeting Minutes. Also on tap are the Employment Change and Unemployment Rate reports.

Finally, Fed Chairman Jerome Powell will testify before Congress. There is no doubt that he will be discussing the direction of interest rates, strengthening inflation and the potential impact of a trade war on U.S. economic growth.

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