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AUD/USD and NZD/USD Fundamental Daily Forecast – Pressured by Monetary Policy Divergence

By:
James Hyerczyk
Published: Jun 28, 2017, 03:17 UTC

The Australian and New Zealand Dollars posted a volatile, two-sided trade on Tuesday before settling lower. Hawkish comments from European Central Bank

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The Australian and New Zealand Dollars posted a volatile, two-sided trade on Tuesday before settling lower. Hawkish comments from European Central Bank President Mario Draghi suggested the ECB may begin lifting stimulus and raise interest rates. Hawkish comments from Philadelphia Fed President Patrick Harker also helped underpin the U.S. Dollar.

The reason this news is significant is because of the divergence in monetary policy between the ECB and Fed and the Reserve Bank of Australia and the Reserve Bank of New Zealand. The ECB and Fed are talking about raising rates while the RBA and RBNZ are still stuck in neutral.

The AUD/USD closed at .7582, down 0.0003 or -0.04% and the NZD/USD settled at .7267, down 0.0021 or -0.28%.

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Daily AUD/USD

ECB President Draghi triggered a surge in the Euro with hawkish comments which may have opened the door to steps that might begin to reduce the central bank’s emergency stimulus to the economy.

At a conference in Portugal, Draghi said the ECB could adjust its policy tools of sub-zero interest rates and massive bond purchases as economic conditions improve in Europe. He also said that any changes in policy should be gradual because “considerable” monetary support is still needed. He also noted that a rebound in inflation will depend on favorable global financing conditions.

Philadelphia Fed President Patrick Harker helped provide support for the U.S. Dollar when he said he supports the decision to raise interest rates again this year, given recent inflation weakness, even though he predicts prices will take longer to rebound to the Fed’s goal.

“I’m sticking to my outlook that we’re on the right path,” Harker told the European Economics and Financial Center in London, according to his prepared remarks. “In the case of inflation, I’ve seen the factors exerting downward pressure as temporary.”

In other news from New Zealand, the annual trade balance widened from $3.6 billion to $3.8 billion, with the balance for May smaller than expected because of a spike in oil imports.

The merchandise trade balance for May, the difference between exports against imports, stood at $103 million, with $4.95 billion exports against $4.84 billion imports, according to Statistics New Zealand.

NZDUSD
Daily NZD/USD

Forecast

The price action by the NZD/USD strongly suggests the selling is greater than the buying at current price levels. If there is a follow-through break on Wednesday then this will mean that momentum has shifted to the downside. This would put the Forex pair in a position to break sharply over the near-term.

The sell-off in the AUD/USD wasn’t as steep as the sell-off by the NZD/USD, but nonetheless, it indicates that short-sellers may be defending the previous main top at .7635.

The monetary policy divergence between the Fed and the RBA and RBNZ could start to weigh on the Australian and New Zealand Dollars because it doesn’t look like the Fed is going to back off its forecast for at least one more rate hike in 2017.

On Thursday we could find out more about the strength of the U.S. economy with the release of several economic reports including the Goods Trade Balance, Preliminary Wholesale Inventories and Pending Home Sales.

Simply stated, if U.S. Treasury yields continue to rise then the AUD/USD and NZD/USD should see renewed selling pressure.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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