AUD/USD and NZD/USD Fundamental Weekly Forecast – Could Struggle as Investors Become More Risk Averse

Last week, rising U.S. Treasury yields and a drop in demand for riskier assets pressured the Australian and New Zealand Dollars. This week, these two factors should remain near the top of the list of catalysts driving the price action, however, investors will also have a chance to react to important economic data from both countries that could have an impact on central bank policy.

During the week-ending January 15, the AUD/USD settled at .7704, down 0.0062 or -0.79% and the NZD/USD finished at .7130, down 0.0108 or -1.49%.

Weekly Recap

The Australian and New Zealand Dollars traded lower last week against the greenback, as rising U.S. Treasury yields helped drive up demand for the U.S. currency. The prospect of more fiscal stimulus under President-elect Joe Biden also weighed on U.S. government bonds, driving Treasury yields sharply higher.

Treasury yields have been slowing creeping higher since Biden won the election in November, but it was a spike above 1% by the 10-year Treasury note that finally caught the attention of currency traders. Most had been lulled into the prospect of more stimulus weakening the U.S. Dollar, but last week, traders finally started to ask themselves, “How is the U.S. going to pay for all this stimulus?”

The answer to that question is sell more government debt. But in order to attract enough buyers, the Treasury has to offer competitive yields and that drove rates higher, encouraging dollar shorts to cover positions.

Australian Employment Change and Unemployment Reports

On Thursday, Australia will release new data on the monthly employment change and unemployment rate. The first report is expected to show the economy added 50.0K jobs in December. The second report is forecast to show a slight dip in the unemployment rate from 6.8% to 6.7%.

Australia’s labor market is recovering faster than expected thanks to an easing in coronavirus restrictions and a rebound in consumer spending, but it will take years for unemployment to fall to desired levels, said the Reserve Bank of Australia (RBA) in December.

Minutes of the RBA December policy meeting showed its Board feared a protracted period of unemployment lay ahead and rectifying that would be a “national priority.”

New Zealand Consumer Inflation Report on Tap

Economists see a diminishing risk that New Zealand will get the dreaded deflation – which means that the Reserve Bank (RBNZ) is now expected to be under less pressure to keep pushing interest rates down.

Whereas not so long ago it was almost universally though among economists that the RBNZ would take the Official Cash Rate (OCR) down below zero in the early part of this year (from the current 0.25%) this is now being seen as unnecessary. Indeed ANZ economists changed their call last week and now don’t see the OCR going negative.

New Zealand Quarterly CPI is expected to come in at a dismal 0.2%, lower than the previously reported 0.7%.

Weekly Outlook

While a stronger than expected Australian jobs report and steady CPI data from New Zealand would be potentially bullish for the Aussie and the Kiwi, the two month rally probably represented that investors were pricing in those outlooks.

Over the short-run, however, the key price drivers will be the direction of U.S. Treasury yields and investor demand for riskier assets.

For a look at all of today’s economic events, check out our economic calendar.