AUD/USD and NZD/USD Fundamental Analysis – Forecast for the Week of March 13, 2017

The Australian and New Zealand Dollars finished lower against the U.S. Dollar last week, primarily driven by increased expectations for a Fed rate hike at this week’s Federal Open Market Committee meeting as well as up to as many as three more quarterly rate hikes in 2017.

The AUD/USD finished the week at .7539, down 0.0056 or -0.74%. The NZD/USD closed the week at .6921, down 0.0123 or -1.74%.

Traders believe the March rate hike is a lock, but Friday’s mixed U.S. Non-Farm Payrolls report has raised some concerns over the frequency of future rate hikes.

The Non-Farm Employment Change showed the economy added 235K jobs in February. This was well above the 200K estimate. Last month’s number was revised upward to 238K. This news and the drop in the unemployment rate to 4.7% lent support to the March rate hike.

Helping to raise concerns over the pace of future rate hikes was average hourly earnings which came in at 0.2%. This was equal to the upwardly revised figure to January, but below the 0.3% estimate. This number helped drive down the U.S. Dollar by reducing the chances for frequent future rate hikes.

The New Zealand Dollar also felt pressure from a weaker outlook for the New Zealand economy. Last week, it was reported that manufacturing sales dropped in the fourth quarter. Dairy prices also extended their slide at last week’s GlobalDairyTrade (GDT) auction.

Rising U.S. Treasury yields also helped tighten the spread between U.S. and New Zealand debt instruments. As of Friday, the interest rate yield advantage was only 1 percent on the cash rate and that’s clearly going to narrow if the Fed increases the frequency of its rate hikes this year.

Last week, the Reserve Bank of Australia left its benchmark cash rate at 1.50 percent and signaled economic conditions were in line with its inflation and growth targets.

RBA Governor Philip Lowe said in a statement that conditions have improved over the last few months, with business and consumer confidence picking up. He also added that higher commodity prices have boosted Australia’s national income.

Lowe also said that uncertainties remain and China is one of the risks. Domestically, the governor said, underlying inflation will likely remain low “for some time” given the subdued growth in labor costs.

Australian monthly retail sales were in line with expectations, up 0.4%.

Forecast

The AUD/USD and NZD/USD could firm this week as investors adjust positions after digesting Friday’s mixed U.S. Non-Farm Payrolls report. The close for the week will be determined by Wednesday’s Fed monetary policy statement.

If the Fed sounds hawkish then this could mean more frequent rate hikes are still a possibility. This will increase of the odds of a rate hike in June, September and December.

If the Fed’s statement is perceived as dovish then the central bank may skip a June rate hike, but still leave a September and/or December rate hike data dependent.

Key U.S. reports include producer and consumer inflation, retail sales, building permits, manufacturing and consumer sentiment.

Fourth-quarter GDP in New Zealand is expected to come in at 0.7%, lower than the previous 1.1% percent read.

The Australian Employment Change is expected to show the economy added 16.3K jobs and the unemployment rate is expected to come in unchanged at 5.7%.

The reports could cause some short-term volatility, but the main direction will be determined by whether the Fed statement is dovish or hawkish.