AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie Momentum May Be Slowing Ahead of Jobs Data

The Australian Dollar was a big winner on Tuesday, surging to its highest level in more than two years on the back of an upbeat assessment of the economy from the Reserve Bank of Australia.

The AUD/USD was strong enough to settle at .7916, up 0.0119 or +1.53%.

The RBA helped initially spark the rally after the minutes from its last meeting in early July showed policymakers were markedly optimistic about the economy. They were particularly upbeat on wages growth and the labor market.

Additionally, the Aussie Dollar was boosted by the narrowing in Australia’s current account deficit and by a decline in the U.S. Dollar and rising commodity prices.

Basically, the AUD/USD strengthened because the central bank’s positive economic outlook led investors to narrow the odds on a hike in interest rates.

The New Zealand Dollar had a volatile session on Tuesday, first plunging on surprisingly soft domestic inflation data before rebounding in reaction to the surge in the Australian Dollar and drop in the U.S. Dollar.

The NZD/USD settled the session at .7347, up 0.0030 or +0.41%.

Forecast

Although the RBA painted an optimistic picture of the economy while dropping its neutral level of interest rates from 5 percent to 3.5 percent, the central bank is not likely to raise its benchmark interest rate this year. Therefore, we have to conclude that the AUD/USD is currently trading a little ahead of itself.

However, don’t expect prices to begin retreating just yet until we find out a little more about the direction of Fed policy at next week’s key monetary policy meeting and interest rate decision.

My conclusion about Australian interest rates is based on the current survey that showed a narrowing of the odds on a future rise in the 1.5 percent cash rate, implying around a 20 percent chance of a move by December.

In New Zealand, the currency rallied despite a soft inflation reading which lowered the risk of a rate hike anytime soon. The current quarterly inflation data indicates inflation is rising, but this doesn’t mean the economy is overheating. Therefore, we have to conclude that the Reserve Bank of New Zealand sees no need to hike rates this year or the next.

Looking ahead to Thursday, Australian Dollar investors will get the chance to react to the latest Employment Change and Unemployment Rate reports. The Employment Change report is expected to show the economy added 14.4K jobs in June. The Unemployment Rate is expected to rise slightly from 5.5% to 5.6%.

Since the RBA minutes said, “Members noted the strength of recent labor market data had removed some of the downside risks in the bank’s forecast of wage growth”, we’ll get to see early Thursday if the employment report numbers support this conclusion.