AUD/USD and NZD/USD Fundamental Weekly Forecast – Don’t Expect the RBA to Join the Hawkish Central Banks

A weaker U.S. Dollar was primarily behind the surge by the Australian and New Zealand Dollars last week. Although the Reserve Bank of Australia and Reserve Bank of New Zealand made no comments about future rate hikes last week, their respective currencies posted strong rallies because investors felt that rising global interest rates would push up domestic rates, making the Aussie and Kiwi more attractive investments.

The AUD/USD finished the week at .7687, up 0.0119 or +1.58% and the NZD/USD settled at .7329, up 0.0049 or +0.67%.

There weren’t any major economic reports last week out of Australia or New Zealand so investors were left to react to the big story of the week – rising global interest rates.

In Australia, minor reports included HIA New Home Sales, which came in at 1.1%, up from 0.8%. Private Sector Credit was unchanged at 0.4%. Rising iron ore prices also helped boost the Australian Dollar. The persistent rebound in iron ore has led to a total gain of 21 percent since June 13.

In New Zealand, the Trade Balance narrowed to 103 million. This was below the 420 million forecast and the 536 million previous read. ANZ Business Confidence was sharply higher than the previous read at 24.8. Business Consents were also stronger-than-expected, up 7.0%. This was much better than the revised -7.4% from last month.

Helping to boost both the Aussie and the Kiwi late in the week was stronger-than-expected manufacturing data out of China, Australia’s biggest trade partner. The official manufacturing PMI strengthened to 51.7 in June, from 51.2 in May, adding to signs the world’s second largest economy maintained its growth momentum in the second quarter.

Forecast

This week, investors will focus on several major reports from Australia. Retail Sales are expected to dip to 0.3% from 1.0%. The Australian Trade Balance is expected to come in at 1.11 billion, up from 0.56 billion. The week ends with the start of G20 meetings.

The major report is the RBA Bank Statement. The key question that needs to be answered when the RBA meets on Tuesday is whether it will join the hawks in calling for higher interest rates.

Futures trading has priced in only a 2 percent chance of a rate cut. Longer-term investors, however, are betting on a full 25 basis point hike in October 2018.

In my opinion, the RBA will change the language of its last statement to edge to the hawkish side from its neutral stance, but I don’t think it’s ready to change rates in the near future. It may even try to talk down its currency.

Given that the Reserve Bank of New Zealand has signaled rates will be on hold for until September 2019, the New Zealand Dollar’s strength is surprising. This divergence suggests the NZD/USD may be overvalued and ripe for a correction.

Short-term the Australian and New Zealand Dollars may move higher if the U.S. Dollar continues to weaken, but a stronger Greenback will put pressure on the AUD/USD and NZD/USD especially if their respective central bank officials try to talk down their currencies with dovish commentary.