AUD/USD and NZD/USD Fundamental Forecast – April 28, 2017

The AUD/USD remains under pressure on Friday as investors continue to react to this week’s weaker-than-expected first quarter consumer inflation report. The Australian Dollar is likely to continue to retreat against the U.S. Dollar due to the divergence of monetary policy between the Reserve Bank of Australia (RBA) and the U.S. Federal Reserve.

Although the Forex pair is likely to remain vulnerable to periodic short-covering rallies, I don’t expect to see the market suddenly turn bullish along with the trend. We’re likely to continue to see back and fill trading for some time with short-sellers in control.

The RBA is currently dealing with a soft economy and must continue to support an accommodative policy, however, there are still issues over mounting debt imbalances.  So on one hand, lowering rates could help boost economic growth, but this will also fuel the debt bubble. The RBA can’t increase rates to stop the excessive borrowing either so it is being forced to sit on its hands and wait.

At the same time, the U.S. Fed is talking about raising rates as many as two more times in 2017 although the Treasury market seems to think otherwise.

The divergence between the two monetary policies is helping to make the U.S. Dollar a more attractive investment.

U.S. trade protectionism is the primary driver behind the weakness in the NZD/USD. The selling started this week after the U.S. placed a tariff on Canadian lumber imports in response to Canadian restrictions on U.S. daily imports.

New Zealand Dollar traders decided that this could be a sign of ‘what’s to come’ and priced in the possibility the same may happen to New Zealand imports to the U.S., especially dairy products. The price action suggests the market seems to be increasing its risk premium with regard to the U.S. government putting imports from New Zealand under review too.

The AUD/USD and NZD/USD are likely to remain under pressure on Friday given the traditional fundamentals, however, stranger things can happen on the last day of the month such as aggressive position-squaring. So continue to think short, but have a plan in case there is a reversal to the upside.