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

The Australian and New Zealand Dollars continued to post strong gains against the U.S. Dollar early Wednesday. Both currencies are being supported by the notion that the U.S. Dollar is overvalued.

The New Zealand Dollar is showing strength despite the latest Reserve Bank of New Zealand Financial Stability report that continued to express concerns surrounding the housing sector. According to the RBNZ, there is a significant risk of further upward pressure on house prices so long as the imbalance between housing demand and supply remains.

The RBNZ is also concerned over the risks associated with lending to consumers with high debt-to income ratios and wants the powers to restrict these ratios if the central bank considers this necessary.

The central bank also said that the increase in prices over recent months should return the sector to profitability, but the increase in debt built up over the past two years leave the sector vulnerable to future shocks.

According to the RBNZ, although the banking sector has strong capital funding buffers and remains high, the reliance on offshore wholesale funding has increased and banks could become more susceptible to increased funding costs and reduced access to funding in the event of increased market volatility.

Finally, given these financial-stability concerns, it will be very difficult for the RBNZ to justify further easing of monetary policy given that further rate cuts would exacerbate the debt concerns.

The NZD/USD received a boost on Wednesday after RBNZ Governor Graeme Wheeler said he expects consumer inflation to move back within its target as soon as December, a sign that record low interest rates were beginning to have their desired effect.

In Australia, questions were raised about the sustainability of the country’s housing boom after the release of a weaker-than-expected building approvals report. Total approvals fell 12.6 percent, the third successive monthly decline, well below the market forecast for a 2 percent increase.

AUD/USD and NZD/USD traders will continue to monitor the OPEC situation today. Since they are commodity-linked currencies, a rise in oil prices could be supportive.