AUD/USD and NZD/USD Fundamental Analysis – Forecast for the Week of January 16, 2017

The Australian and New Zealand Dollars posted solid gains last week, helping both currencies to become top performers so far this year. The primary driver of their strength last week was the weaker U.S. Dollar, but higher commodity prices have also helped underpin the currencies.

The AUD/USD finished the week at .7498, up 0.0204 or +2.80%. The NZD/USD ended the week at .7125, up 0.0172 or +2.47%.

There wasn’t much economic data from both countries last week, but this will change in the upcoming week.

Minor reports in Australia included the AIG Construction Index, Building Approvals and the ANZ Job Advertisements report. The big surprise was a sharp increase in building approvals. The report showed a 0.7% gain versus a 4.6% estimate.

The major report was Retail Sales. It showed a disappointing 0.2% gain, coming in under the 0.4% estimate. Last month’s report showed a 0.5% gain.

In New Zealand, ANZ Commodity Prices came in at 0.7%, below last month’s revised 3.2% gain.

The U.S. Dollar was primarily under pressure due to uncertainty surrounding the economic policies of President-elect Donald Trump. Both currencies surged against the dollar after Trump failed to comment on his plans to rebuild America through aggressive fiscal spending, lower taxes and relaxed banking regulations.

Both the Aussie and the Kiwi have been strong performers since late December and are currently the top two performing currencies in 2017. Some of the rally has been fueled by aggressive short-covering due to oversold conditions and undervalued prices.

Although most investors believe the AUD/USD and the NZD/USD weakened in December due to the Fed rate hike and expectations of as many as three rate hikes in 2017, the actual sell-off was likely related to the fear of major capital outflows from China. This would have pushed down China’s Yuan and damaged the Australian and New Zealand Dollars.

The sell-off was priced into both currencies, however, the flood of money out of China failed to resume. This triggered the start of aggressive short-covering rallies.

Forecast

The Aussie and the Kiwi could be supported this week by rising iron ore and gold prices, however, the primary price driver will be the direction of the U.S. Dollar. It is going to continue to be affected by Trump. The dollar is likely to remain under pressure as long as Trump keeps his policy plans to himself, but he could drive the dollar higher if all he says is something like “I have a plan and I’m going to reveal it shortly after my inauguration. “

Economic reports in the U.S. this week include Consumer Inflation, Building Permits and the Philly Fed. Fed Chair Janet Yellen is also scheduled to speak.

New Zealand is scheduled to report on the GDT Price Index. Australia will report on the Employment Change and the Unemployment rate.