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AUD/USD and NZD/USD Fundamental Weekly Forecast – Higher on Weak Dollar, Strong Technical Reversal

James Hyerczyk
The AUD/USD and NZD/USD will rally this week if the U.S. Dollar continues to retreat due to Powell’s dovish comments. Increased demand for risk will be another bullish factor driving the Aussie and Kiwi higher. Gains could be limited if Treasury yields rise too rapidly. Investors will also be watching the start of higher level trade talks between the United States and China on January 7-8.

The Australian and New Zealand Dollars went on a roller-coaster ride before settling higher last week. The Aussie and Kiwi were hit by a “Flash Crash” early Thursday with the Australian Dollar feeling the brunt of the selling pressure. According to Reuters, the Australian Dollar suffered some of the largest intra-day losses in its history amid a “drought of liquidity and a cascade of computerized sales.”

For the week, the AUD/USD settled at .7119, up 0.0080 or +1.14% and the NZD/USD finished at .6736, up 0.0029 or +0.44%.

The daily chart showed that a one point the Australian Dollar was down 5 percent against the Japanese Yen and almost 4 percent versus the U.S. Dollar, before clawing back much of the losses as trading conditions calmed and humans intervened to stabilize the markets.

Both the AUD/USD and NZD/USD rallied on Friday to finish the week higher in response to Federal Reserve Chairman Jerome Powell’s dovish remarks on central bank policy.

Traders Watching Activity Out of China

The Chinese National Bureau of Statistics said the country’s official Manufacturing Purchasing Managers’ Index (PMI) was 49.4 for December, missing analyst estimates of 49.9.

The data revealed that activity in China’s manufacturing sector contracted for the first time since February 2016 in the month of December. Traders blamed the contraction on a domestic economic slowdown and the on-going trade dispute between the United States and China.

Later in the week, this negative data was somewhat offset by another report from China which showed solid expansion in the services sector, which accounts for more than half of China’s economy. The Caixin/Markit Services Purchasing Managers’ Index (PMI) rose to a six-month high of 53.9 in December, up from 53.8 in the previous month.

Despite the solid data, total new order growth eased slightly, pointing to softening domestic demand. Official Services data released earlier suggested consumer demand and confidence have

On Friday, China jump-started the Aussie and Kiwi rally when it confirmed it would hold vice-ministerial level trade talks with the United States in Beijing on January 7-8.

Dovish Fed Contributes to Weekly Rise

The Aussie and Kiwi finished sharply higher on Friday on the back of two key bullish U.S. events. In the first event, the Labor Department’s December jobs report showed the economy added a robust 312,000 jobs. This was much higher than the consensus forecast of 176,000 jobs. Shortly thereafter, Federal Reserve Chairman Jerome Powell said the central bank will be more accommodative by exercising patience in raising rates, subduing fears of a hawkish Fed in 2019. The dovish remarks made the U.S. Dollar a less-attractive investment.

Forecast

The AUD/USD and NZD/USD will rally this week if the U.S. Dollar continues to retreat due to Powell’s dovish comments. Increased demand for risk will be another bullish factor driving the Aussie and Kiwi higher. Gains could be limited if Treasury yields rise too rapidly. Investors will also be watching the start of higher level trade talks between the United States and China on January 7-8.

The major event in Australia will be Friday’s Retail Sales report. Minor events include Tuesday’s Trade Balance and Wednesday’s Buildings Approval report.

The major U.S. reports this week are the ISM Non-Manufacturing PMI report on Monday and Friday’s U.S. Consumer Inflation Reports.

The Fed minutes will be released on Wednesday and Fed Chair Powell is scheduled to deliver another speech on Thursday.

On Wednesday and Thursday, investors should pay close attention to the slew of Fed speakers. We want to see which speakers agree with Powell, and which see things differently. This should create some volatility. If all agree with Powell then this could mean the Fed will refrain from making any rate hikes in 2019.

This article was originally posted on FX Empire

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