AUD/USD and NZD/USD Fundamental Forecast – April 27, 2017

The Australian Dollar was under pressure on Wednesday as investors failed to react to increased demand for higher-yielding assets, but continued to be driven by disappointing Australian inflation data.

The AUD/USD finished the session at .7473, down 0.0061 or -0.82%.

Early Wednesday, the Australian consumer inflation report triggered a steep sell-off after it showed price growth undershot Analyst’s expectations in the first quarter.

The Australian inflation data showed prices rose by 2.1% in the first quarter of 2017, which was above the 1.5% registered in the fourth quarter but not as high as the 2.2% forecast by analysts.

The New Zealand Dollar was down against all major currencies on Wednesday as investors continued to react to anti-trade concerns over dairy prices.

The NZD/USD finished the session at .6950, down 0.0078 or -1.10%.

Both the Aussie and the Kiwi fell in reaction to President Trump’s much-vaunted tax reform plans, however, they both bounced back into the close after news broke that investors were disappointed by the tax plan because it didn’t contain any major surprises.

Forecast

The fundamentals are bearish for the AUD/USD so I expect to see further downside action. On Wednesday, the selling stopped when the Forex pair reached a major technical level on the daily chart at .7454. Additionally, oversold technical conditions may have played a role in the market’s late session comeback.

Based on the early price action, we could see further short-covering on Thursday, primarily due to oversold conditions. A sustained move through .7454 will be a strong sign that aggressive short-sellers have returned.

I’m bearish the Aussie because the inflation data not only fell short of the estimate, but it also remained below the Reserve Bank of Australia’s (RBA’s) target of 3.0%. This likely means it will continue to keep interest rates on hold for even longer than previously thought.

Oversold technical factors could also trigger a short-covering rally by the NZD/USD, but gains could be capped because investors are still nervous over the Trump Administration’s anti-trade talk.

In other news out of New Zealand, Finance Minister Steven Joyce promised to pump $11 billion into new infrastructure spending in the next four years. He also set a new debt target for the Government, beyond the current 20 percent of gross domestic product (GDP) by 2020, lowering it to 10 – 15 percent by 2025.

Joyce also reaffirmed a commitment to cutting taxes when there was room to do so, “in particular the impact of marginal tax rates on lower and middle income earners”.

Finally, Joyce added, one of the biggest risks to the economy was the “more insular economic policies being pushed overseas, and by our opponents domestically”.