AUD/USD and NZD/USD Fundamental Daily Forecast – Investors Keying on U.S. Interest Rate Differential

Mixed U.S. Treasury yields and disappointing economic data helped underpin the Australian and New Zealand Dollars on Friday.

The AUD/USD settled at .7568, up 0.0028 or +0.37% and the NZD/USD closed the session at .7280, up 0.0016 or +0.23%.

There were no economic reports from Australia and New Zealand on Friday, but investors were most interested in the direction of U.S. interest rates anyway.

In U.S. economic news, new home sales rose 2.9 percent in May, below the expected increase of 3.7 percent. The data showed new home sales came in at 610K units, higher than the 599K estimate and the upwardly revised 593K units from last month.

Flash Manufacturing PMI disappointed, coming in at 52.1, below the 53.1 forecast and 52.7 previous read. Flash Services PMI was also below expectations at 53.0. Traders were looking for 53.9.

In other news, St. Louis Fed President James Bullard said Friday there is still no need to further raise short-term rates right now. Bullard said the Federal Reserve can afford to stop raising short-term interest rates and wait and see how economic developments and policy debates play out in coming quarters.

Bullard said he saw no reason to raise interest rates as the economy appears to be firmly stuck in a “low growth, low inflation and low-interest-rate regime.”

“Many future developments could impact the Fed’s policy path, but the Fed does not need to pre-empt any of them,” Bullard said in a speech to a bankers’ convention in Nashville.

The New Zealand Dollar continued to be supported by Thursday’s actions by the Reserve Bank of New Zealand. It left interest rates unchanged as expected, but it also failed to talk down the Kiwi like many investors had anticipated.

Over the near-term, the direction of the AUD/USD and NZD/USD is going to be dictated by the direction of U.S. interest rates. Based on commentary earlier in the week, the Fed is likely to raise rates at least one more time before the end of the year. However, the market feels that the economy is too weak to do this.

This means that traders should expect to see volatility over the near-term as the U.S. Dollar will be more sensitive to economic data and commentary from Fed officials. Weakness in commodities like crude oil could weigh on the Aussie, or cap its gains.