AUD/USD and NZD/USD Fundamental Forecast – December 8, 2016

Increased demand for higher risk assets and a weaker U.S. Dollar helped drive the Australian and New Zealand Dollars higher on Wednesday. The AUD/USD closed at .7481, up 0.0021 or +0.29%. The NZD/USD finished the session at .7162, up 0.0043 or +0.60%.

The Australian Dollar sold-off early in the session after the government reported that quarterly GDP dropped 0.5% percent. However, the Greenback’s slip on Wednesday, coupled with a rise in iron ore, helped the Aussie recover into the close. Prices for iron ore rose almost 3.5 percent.

The inability of the New Zealand Dollar to break a key support area at .7080 indicated that buyers were coming in to support the market. Some of the buying was on the notion that the U.S. Dollar was overvalued, some on the RBNZ forecast for higher inflation. Either way, the recent four days of consolidation has put the market in a position to challenge last week’s high at .7169.

Also supporting the NZD/USD was increased appetite for risky assets and speculation that Reserve Bank Governor Graeme Wheeler would paint a more upbeat picture of the economy in the government’s fiscal and economic update.

Forecast

Early Thursday, the NZD/USD spiked higher after the RBNZ’s Wheeler painted a glowing picture of the economy, but warned of uncertainties ahead.

Wheeler said, “Relative to the trends over the past two decades, we are experiencing stronger economic growth, lower inflation, and a lower unemployment rate.”

Wheeler also said that in the absence of major unanticipated shocks, “prospects look good for continued growth over the next 18 months, driven by construction spending, migration, tourism and “accommodative monetary policy”.

The top central banker also talked about some issues he had with the economy.

He said, economic growth was weaker than other post World War II expansions, gross domestic product growth on a per capita basis was slow and labor productivity growth disappointing.

“House price inflation is much higher than desirable and poses concerns for financial stability, and the exchange rate is higher than the economic fundamentals would suggest is appropriate,” he added.

Wheeler also said the low point of inflation “has probably passed” and he expected figures due next week would show it moving back within the target band.

As for his outlook for 2017, he warned New Zealand faces considerable political and economic uncertainties.

“The greatest threat to expansion lies in possible international political and economic developments and their implications for the global trading environment,” he said.

“The main domestic risk – and one that could be triggered by developments offshore – is a significant correction in the housing market.”

“This has put downward pressure on our interest rate structure and contributed to asset price inflation and upward pressure on the New Zealand Dollar. This trend may finally be turning.”

Wheeler’s comments are bullish, which likely means a test of the major retracement zone at .7186 to .7237. Trader reaction to this zone will dictate the longer-term direction of the NZD/USD.

As far as the AUD/USD is concerned, taking out .7497 is likely to create the upside momentum needed to challenge .7544 to .7599. This is the primary objective of the current rally. Trader reaction to this area will determine whether the market moves higher or lower over the near-term.