AUD/USD and NZD/USD Fundamental Analysis – Forecast for December 2016

The Australian and New Zealand Dollars closed lower in November against the U.S. Dollar. The AUD/USD finished the month at .7382, down 0.0226 or -2.97%. The NZD/USD closed at .7081, down 0.0068 or -0.95%.

The price action was primary driven by rising U.S. Treasury yields and increasing odds for a Fed rate hike in December.

U.S. Treasury yields soared after the surprise election of Donald Trump as President of the United States. Upon winning the election, Trump said he was going to rebuild America through fiscal spending and tax cuts. Traders read this as inflationary, driving up yields. Additionally, investors sold Treasury bonds and notes and put the proceeds to work in the U.S. equity markets. This also helped drive up yields.

Strong U.S. economic data released throughout the month also helped boost the chances for a Fed rate hike in December. This also helped support the U.S. Dollar against the Aussie and the Kiwi.

In New Zealand, the Reserve Bank of New Zealand cut its benchmark interest rate by 25 basis points to 1.75%. This put further pressure on the currency. The central bank also left open the possibility of future rate cuts.

The Reserve Bank of Australia left its benchmark interest rate unchanged and hinted that it may be finished with this current interest rate cycle, but may revisit the idea of further rate cuts in 2017, if necessary.

Forecast

Despite firming Treasury yields and the strong possibility of a Fed rate hike in December, the AUD/USD and NZD/USD started to form a support base late in the month. This suggested that the U.S. Dollar may be overvalued.

If this is the case then we could see the Aussie and Kiwi trade higher early in the month. Since the Fed rate hike has likely been already priced into the market, the two currencies may be allowed to drift higher until then hit near-term resistance. For the AUD/USD, this resistance comes in at .7544 to .7599. The upside target for the NZD/USD is .7186 to .7237.

The first key report in the U.S. is the Non-Farm Payrolls report on Friday, December 2. It will be the last key jobs report before the Fed’s interest rate decision on Wednesday, December 14.

Despite being priced into the market, the Fed’s decision to raise rates is likely to create some volatility especially if it talks about the number of future rate hikes in 2017. Currently, the market action in the Treasurys is suggesting multiple rate hikes may be possible if Trump starts spending money or cutting taxes. However, the Fed has already said that one rate hike may be sufficient. The conflict between Treasury traders and the Fed is going to be a key issue throughout 2017.