Yahoo Finance AUD/USD and NZD/USD Fundamental Weekly Forecast – Weak Aussie CPI Could Outweigh Impact of Fed Decisions
The Australian and New Zealand Dollars broke sharply last week with the selling pressure driven by stronger-than-expected U.S. economic data and domestic central bank activity. There were no major economic reports in Australia and New Zealand, however, the U.S. government released surprisingly strong economic reports.
Investors were also positioning themselves ahead of the U.S. Federal Reserve policy decisions on July 31. The price action suggests that investors greatly reduced the chances of an aggressive 50-basis point rate cut, while holding steady the chances of the widely expected 25-basis point rate cut.
Australian Dollar
The Australian Dollar was pressured by a combination of stronger-than-expected U.S. Durable Goods and GDP data. Traders also cut long positions as the financial markets reduced the chances of an aggressive 50-basis point rate cut by the Fed. However, the heavy selling pressure was fueled by dovish comments from Reserve Bank of Australia (RBA) Governor Philip Lowe.
Lowe said last week the central bank could keep cutting the cash rate in the coming months to support the ailing economy. After back to back rate cuts in June and July drove the RBA’s benchmark rate to an unprecedented 1%, Lowe said in Sydney on July 25 that borrowing costs were likely to remain low for some time.
“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates,” Lowe said.
The RBA is not expected to cut rates at its August 6 meeting, but it will be going into the meeting “live”. This means anything can happen. In the meantime, Westpac predicted cuts in October and February as economic indicators continued to point to weak growth and stagnant wages. Additionally, a consensus of economists believe the rate will reach 0.5% by early 2020 with one cut in the spring and another in the new year.
Last week, the AUD/USD settled at .6911, down 0.0131 or -1.86%.
New Zealand Dollar
Last week, the Reserve Bank of New Zealand made an announcement that showed policymakers believe the New Zealand economy is no longer immune to unconventional policy. The central bank cut its benchmark rate to 1.5% in May and economists expect another reduction on August 6 amid tepid inflation and slowing economic growth. With the benchmark rate expected to drop to 1% by the end of the year, the RBNZ will likely have to turn to unconventional measures to help stimulate the economy.
“This year the Reserve Bank has begun scoping a project to refresh our unconventional monetary policy strategy and implementation. This is at a very early stage,” the RBNZ said in response to an Official information Act request for work on non-standard policy measures.
One unconventional measure could be to take the OCR below zero. The RBNZ could also conduct large scale purchases of either government or corporate bonds, known as quantitative easing.
Last week, the NZD/USD settled at .6639, down 0.0122 or -1.81%.
Weekly Forecast
The Fed is widely expected to cut its benchmark rate 25-basis points on July 31. This news has been priced into the market for several weeks.
The market moving event will be Fed policy toward future rate cuts. Investors want to know if the Fed will follow-up this rate cut with another in September and December. Or, if it will skip September and cut again in December.
Investors will also want to know what criteria Fed policymakers will use to make their decisions. This is important because the U.S. economy is strong and the Fed will be making preemptive strikes to keep the expansion going.
The AUD/USD and NZD/USD will strengthen if the Fed is explicitly dovish. In other words, a clear signal has to be sent to investors that rates will be coming down for some time.
The direction of Aussie and Kiwi will ultimately be determined by the direction of U.S. Treasury yields. If yields fall then this will send a signal that the market feels the Fed should’ve been more aggressive. If yields stay flat or rise then this will signal that Fed policymakers got it right. Rising Treasury yields will make the U.S. Dollar a more attractive asset.
After the Fed announcements, investors will quickly shift their focus toward the August 6 RBA and RBNZ monetary policy meeting.
Wednesday’s Australian CPI and Friday’s Retail Sales reports could determine whether the RBA makes a third consecutive rate cut at its next meeting. Right now, investors don’t expect central bank policymakers to make any changes.
The RBNZ is widely expected to cut rates on August 6. The key report to watch this week is Wednesday’s ANZ Business Confidence report.
This article was originally posted on FX Empire
