AUD/USD and NZD/USD Fundamental Daily Forecast – Price Action Suggests Dovish Expectations from RBA Minutes

The Australian and New Zealand Dollar closed sharply lower against the U.S. Dollar on Monday as investors prepared for a busy week. Both currencies rallied early in the session before getting slammed by a stronger U.S. Dollar.

The U.S. Dollar was supported by a rise in U.S. Treasury yields, as traders waited for an impending Federal Reserve meeting for clues on whether U.S. interest rates could rise again by year-end.

At the end of its two-day meeting on Wednesday, the Fed is widely expected to announce that it will begin pairing its massive portfolio of Treasuries and mortgage-back securities, with the reductions likely to start this year.

In addition to an interest rate decision and monetary policy statement, the FOMC is also expected to release its economic projections. Investors are saying the primary reason U.S. yields are creeping up is that the market has decided that the Fed is unlikely to change the December 2017 dot – indicating they expect one more rate hike this year.

Australian Dollar

Prior to Monday’s steep sell-off, Australian Dollar speculators were betting on a hawkish Reserve Bank of Australia based on its recent tone. Additionally, speculators had started to price in a more optimistic outlook for the Australian economy, and thus, a more hawkish RBA. Furthermore, speculators had started to believe the labor market had strengthened enough to allow the RBA to remove some of the emergency stimulus currently in place.

Continuing on the bullish side, last week’s report on Australian Employment showed the economy had added a very strong 54.2K jobs in August, continuing this year’s strength, while the unemployment rate came in at 5.6%, unchanged from July. Once again bullish speculators said the strength in the labor market will add more confidence to the RBA’s outlook and belief that wage growth will gradually accelerate.

Despite this optimistic outlook by the Australian Dollar bulls, there are still several bearish factors to contend with. Last week, RBA board member Ian Harper said economic growth isn’t strong enough to justify an interest-rate increase and policymakers can do little but look on as the local dollar appreciates.

Governor Philp Lowe said the economy still needs low-interest rates to help bring down unemployment and spur core inflation to the mid-point of the 2 percent to 3 percent target.

Despite the strong support from speculative buyers recently, Monday’s price action strongly suggests the market expects the RBA minutes to reveal a dovish tone from the central bank. I don’t expect the RBA to provide a bullish catalyst for the Australian Dollar.