Yahoo Finance AUD/USD and NZD/USD Fundamental Weekly Forecast – US-China Trade News Bullish on Paper; RBA Rate Cut Priced-in
The Australian and New Zealand Dollars finished sharply higher last week with the price action driven by central bank comments. Surprisingly hawkish remarks by the Reserve Bank of Australia (RBA) Governor helped underpin the Aussie, while the Reserve Bank of New Zealand (RBNZ) decision to leave rates unchanged in June fueled the rally in the Kiwi.
Last week, the AUD/USD settled at .7022, up 0.0096 or +1.39% and the NZD/USD closed at .6717, up 0.0129 or +1.96%.
Expectations of a U.S. Federal Reserve interest rate cut at its July 30-31 monetary policy meeting also helped drive the Aussie and Kiwi higher even after dovish comments from Federal Reserve Chairman Jerome Powell and St. Louis Federal Reserve President James Bullard dampened hopes by some investors that Fed policymakers would deliver a half-point interest rate cut in July. A 100% chance of a 25 basis point rate cut is still being priced in my U.S. Federal Funds investors.
Australian Dollar
Although the RBA is expected to cut rates this week on Tuesday, comments last week from RBA Governor Philip Lowe indicated a somewhat dovish tone moving forward. Lowe essentially said that to expect a further interest rate cut was “no unrealistic”.
In a prepared speech, Lowe acknowledged that lower rates could help boost price power via the channel of weaker currency but also that monetary options were not the only one available. Lowe further pointed out that there is only so much that another quarter-percentage point cut can hope to achieve.
Short-sellers read the comments as dovish and an indication that the July 2 cut may be the last this year, thereby triggering an aggressive short-covering rally throughout the week.
New Zealand Dollar
The Reserve Bank of New Zealand (RBNZ) held interest rates steady on June 26, but said further cuts to borrowing costs may be needed given growing economic risks at home and abroad.
The RBNZ kept the official cash rate (OCR) at a record low of 1.50%, as expected, and in a strikingly dovish statement warned that a global slowdown is hurting the domestic economy amid intensifying trade risks.
“The global economic outlook has weakened, and downside risks related to trade activity have intensified,” the RBNZ said.
“Given the downside risks around the employment and inflation outlook, a lower OCR may be needed,” it said, having lowered the cash rate by 25 basis points at their last meeting in May.
Speculative buyers didn’t seem to care that the RBNZ was indicating a likely rate cut in the OCR in August and perhaps a 1.00% rate by the end of the year.
Forecast
This week’s focus for investors will be on this weekend’s decision by the United States and China to resume trade talks after U.S. President Trump and Chinese President Xi Jinping met at the G-20 summit in Osaka, Japan.
On paper the news is bullish for the Australian Dollar since the country is China’s largest trade partner. However, there are still concerns that the trade dispute will continue to linger on because the two parties are still wide apart on issues
The direction of both the Aussie and the Kiwi will be determined by how optimistic speculators are that a trade deal could be struck before sending the global economy into a recession.
On Tuesday, July 2, the RBA is expected to cut its benchmark interest rate 25 basis points to 1.00%. This move has already been discounted. Traders will also get the opportunity to react to data on Building Approvals and Retail Sales.
In the U.S., the key reports early in the week are ISM Manufacturing PMI and ISM Non-Manufacturing PMI. The major report is Non-Farm Payrolls. Traders will be watching for solid growth in the headline number, and steady Average Hourly Earnings and Unemployment Rate.
Thursday, July 4 is a U.S. bank holiday so trading may be thin on Friday also. We may not see a reaction to the jobs data until next Monday or Tuesday.
This article was originally posted on FX Empire
