AUD/USD and NZD/USD Fundamental Daily Forecast – Supported by Jump in China’s Manufacturing Activity

After receiving much of its support this week from hawkish talk from several central bankers, the Australian and New Zealand Dollars rose on Friday in reaction to surprisingly strong economic data from China.

China’s manufacturing activity jumped more than expected in June, suggesting the world’s second-largest economy continues to defy predictions of a downturn.

The official manufacturing Purchasing Managers’ Index rose to 51.7 in June, accelerating from May’s 51.2 and beating the consensus forecast for 51.0.

The services sector also came in better than expected. The official services PMI for June rose for 54.9 from May’s 54.5.

Both the Australian and New Zealand Dollars rose sharply this week. The rally was launched on Tuesday when European Central Bank President Mario Draghi hinted that he may start to withdraw stimulus. This opened the door for the Bank of Canada and the Bank of England to make remarks about raising interest rates.

Essentially, the rally by the Aussie and the Kiwi was really based on U.S. Dollar weakness. The Fed is hawkish but the dollar was overwhelmed by a change in rhetoric from global central bankers.

Given that the Reserve Bank of Australia and the Reserve Bank of New Zealand have signaled rates will be on hold for a while, the Aussie and the Kiwi’s strength is surprising. The divergence in monetary policy, however, suggests the AUD/USD and NZD/USD may be overvalued.

I’m not confident the strength in the Australian and New Zealand Dollars can last without their central banks making some adjustment to their recent monetary policy statements which basically say they are not ready to raise rates at this time or in the near-term future.