AUD/USD and NZD/USD Fundamental Forecast – December 30, 2016

The Australian and New Zealand Dollars are trading mixed on Friday. Early in the session, both currencies reached their highest levels of the week, continuing the end-of-the-year rally that consisted of a combination of short-covering and aggressive counter-trend buying.

The weaker U.S. Dollar had the strongest impact on the two currencies. It retreated on Thursday in reaction to lower U.S. Treasury yields that made the Greenback a less desirable investment. Traders also reacted in mixed stock prices that signaled lower demand for higher risk assets.

In the U.S. on Thursday, Weekly Unemployment Claims came in at 265K, lower than the expected 277K and the previous 275K.  The Goods Trade Balance came in worse-than-expected at -65.3 billion versus an estimate of -61.5 billion. Preliminary Wholesales Inventories were higher than expected at 0.9%. This was also seen as a negative for the U.S. Dollar.

Forecast

The AUD/USD was able to recover from early session weakness fueled by the release of the latest Australian private sector credit report. This could be a sign that the end-of-the-year counter-trend rally will continue into the end of Friday’s session.

According to the report, credit rose 5.4% in November, according to the Reserve Bank of Australia, which was in line with expectations and slightly above October’s 5.3% rise. On a monthly basis, credit rose 0.5%, equally the previous month’s increase.

The RBA’s report also showed that credit for housing purchase rose 6.3% on-year, while business credit added a healthy 4.9%. Personal credit increased by a paltry 1.2%, but this usually occurs before a major spending holiday.

The NZD/USD firmed early in the session on thin-holiday volume before turning slightly lower for the session. The strong short-covering rally this holiday-shortened week has put the Kiwi in a position to post 1.2 percent gain for the first time in two weeks. For the year, it is up about 2.0 percent following three consecutive years of negative returns.

The Aussie and Kiwi were hit hard after Trump’s surprise election, but lately the New Zealand Dollar has been supported by a run of strong economic data and a rally in the price of milk. Whether the currency can continue the rally under the threat of multiple Fed interest rate hikes in 2017 will determine the direction of the Forex pair.

The Australian Dollar, on the other hand, started to show weakness towards the end of the year with the recent GDP report showing the economy shrank for the first time since 2011 in the third quarter, raising the possibility of a recession.