AUD/USD and NZD/USD Fundamental Forecast – December 2, 2016

The AUD/USD and NZD/USD are trading flat ahead of Friday’s U.S. Non-Farm Payrolls report that could set the tone of the markets until the Federal Open Market Committee’s interest rate decision on December 14. The market is currently pricing in a 95% chance the Fed will raise rates at this meeting.

With the December rate hike close to a sure thing, I think investors will start to focus on the frequency of rate hikes in 2017.

Friday’s U.S. jobs report for November is expected to show the economy added about 177K jobs. This is up from the previous 161K. Earlier in the week, ADP said the private sector added 212K jobs. This leads me to believe that the actual NFP headline number will be well above the consensus.

Average Hourly Earnings are expected to increase 0.2%, down slightly from 0.4% last month. The Unemployment Rate is expected to come in unchanged at 4.9%.

On Thursday, the yield on the benchmark 10-year Treasury Note rose to 2.4445. The yield on the 30-year Treasury Bond move up to 3.0986.

U.S. equity markets traded mixed, but a divergence is taking place, indicating that a correction may be coming.

Australian and New Zealand Dollar traders are clashing with two fundamental events at this time:  Rising U.S. Treasury yields and weakening demand for higher-risk assets. This may explain the two-sided trade this week.

Earlier today, Aussie retail sales came in at 0.5%, slightly above the 0.3% consensus. The strong showing suggests that third quarter economic growth is likely to be steady-to-better than previously expected.

The recent price action suggests the AUD/USD and NZD/USD have found support and are likely to remain rangebound. There is room to the upside to complete technical retracements, but in my opinion, we’re not likely to go back to the recent highs.

Both Forex pair are likely to see sellers return on rallies especially if U.S. Treasury yields continue to rise, tightening the interest rate differential between U.S. T-Bonds and Australian and New Zealand Bonds.

The frequency of expected rate hikes in the U.S. in 2017 will likely set the tone for the markets next year. We should find out more about Fed expectations for rate hikes at is meeting on December 14.

In summary, I’m long-term bearish on the AUD/USD and NZD/USD because of expectations of rising U.S. rates. However, I think the declines will be steady and trending because the Australian and New Zealand economies remain relatively strong. The Forex pair could break hard if the RBA or RBNZ decide that rates need to be cut again, but at this time, I can’t see that happening.