AUD/USD and NZD/USD Fundamental Weekly Forecast – Focus on Fed Minutes, U.S. Inflation Data This Week

A divergence in the monetary policies of the U.S. Federal Reserve and the Reserve Bank of Australia along with a firmer U.S. Dollar helped drive the Australian Dollar lower last week.

The AUD/USD settled at .7774, down 0.0056 or 0.71%.

The RBA kept its cash rate on hold at its historic low of 1.5 percent for the 14^th consecutive month at its board meeting on October 3.

The central bank’s monetary policy statement showed the RBA is increasingly confident the economy is strengthening but concerns over anemic wage growth and high household debt will keep it on the sidelines.

The Aussie was also pressured by comments from an RBA board member Ian Harper who explicitly refused to rule out another rate cut. Retail Sales also unexpectedly slipped 0.6 percent month-over-month in August. Traders were looking for an uptick of 0.3%.

New Zealand Dollar

There were no major reports from New Zealand but the New Zealand Dollar continued to remain under pressure. Most of the selling pressure occurred late in the week when the Forex pair broke through major support.

The NZD/USD settled at .7089, down 0.0105 or -1.46%.

Pressuring the NZD/USD was a surprise drop in dairy prices. The GDT price at the GlobalDairyTrade auction fell by 2.4 percent. The housing market also continued to slow down last month according to reports. Investors were also concerned over lingering political issues caused by a mixed election in September.

The U.S. Dollar finished higher last week, despite giving up gains on Friday. The Greenback was primarily driven by improving economic data, rising Treasury yields and increased expectations for a Fed rate hike in December.

The dollar rose to 1 ½ month high as Treasury yields rose after a strong reading for U.S. manufacturing activity hardened expectations for U.S. interest rates to rise by the year-end. ISM Manufacturing PMI data hit a 13 ½ year high with a read of 60.8, better than the 57.9 forecast. Later in the week, ISM Non-Manufacturing PMI also beat the estimate with a read of 59.8, up from 55.3 last month.

On Friday, a Labor Department report showed nonfarm payrolls fell by 33,000 jobs last month amid a record drop in employment in the leisure and hospitality sector. But the unemployment rate fell to 4.2 percent, the lowest since February 2001.

On an annualized basis, average hourly earnings rose to 2.9%. In September they increased 12 cents, or 0.5 percent. The figures for August were revised 0.2 percent.

Economists had forecast a gain of 90,000 jobs in September. The unemployment rate was estimated at 4.4%. Month over month average hourly earnings were forecast at 0.3% and year over year hourly earnings were estimated at 2.5%.

The U.S. Dollar initially rose against a basket of currencies in response to the unexpected rise in wages, however, gains were offset by a report that North Korea is preparing to test a long-range missile.

Forecast

This week’s major reports on loaded on the U.S. side. There are no major reports until Wednesday when the U.S. Federal Reserve releases its monetary policy minutes. Therefore, we could see volatility and a two-sided trade related to Friday’s jobs report or reports that North Korea is planning another missile test.

On Thursday, the U.S. will report on producer inflation. On Friday, the key reports will be consumer inflation and retail sales.

PPI is expected to come in up 0.4%. CPI is expected to come in up 0.6%. Core CPI is estimated to rise 0.2%.

With the chances of a Fed rate hike in December at about 83% according to the Fed Funds Indicator, weaker than expected PPI and CPI data will probably drive this down a little, but I don’t think it’ll be enough to derail the Fed’s plan to raise rates.