AUD/USD and NZD/USD Fundamental Forecast – December 1, 2016

The price surge by the U.S. Dollar on Wednesday helped drive the Australian and New Zealand Dollars sharply lower. The dollar rallied on the back of stronger-than-expected U.S. economic data and OPEC’s decision to cut crude production over the next six months to 32.5 million barrels per day.

The combination of the economic news and OPEC’s decision raised inflationary concerns, lifting U.S. bond yields, while making the dollar a more attractive investment. Although Australian bonds are still offering a relatively high yield, the recent rise in U.S. yields is tightening the spread between the two debt instruments. This is encouraging investors to make adjustments to their portfolios in an effort to capture the best long-term return. The Aussie has been under pressure because in order to do this investors have to liquidate the domestic currency and buy the U.S. Dollar.

Domestically, the Aussie was under pressure because of the weakness in the Australian building approvals data, which showed multi-unit building approvals down 23.5% (YoY), confirming the downturn in construction activity.

In the U.S., the stronger than expected ADP National Employment report for November, pointed toward another strong U.S. Non-Farm Payrolls report on Friday. U.S. consumer spending and personal income also came in strong while the Fed’s Beige Book on economic conditions helped boost demand for the U.S. Dollar late in the session.

Also pressuring the Aussie was a drop in iron ore spot prices. They fell 6.8%, bringing the two-day loss to 10.8%.

On Wednesday, the New Zealand Dollar started out higher in response to positive news from the Reserve Bank of New Zealand. A report suggested the central bank didn’t see any reasons to cut interest rates given a shaky housing market.

Forecast

The direction of U.S. Treasury yields and their impact on the U.S. Dollar will continue to influence the movement in the AUD/USD and NZD/USD.

Early Thursday, the New Zealand Overseas Trade Index fell 1.8%. In Australia, AIG Manufacturing came in a 54.2 and Private Capital Expenditure fell 4.0%.

On Thursday, U.S. investors will get the opportunity to react to several reports. The major reports are Weekly Unemployment Claims and ISM Manufacturing PMI. Unemployment claims are expected to come in at 252K. The ISM report is expected to show an increase to 52.1, up from 51.9.

Minor reports include Challenger Job Cuts, Final Manufacturing PMI, Construction Spending and ISM Manufacturing Prices.

Don’t be surprised if there is consolidation today ahead of Friday’s major U.S. jobs report.