Yahoo Finance AUD/USD and NZD/USD Fundamental Daily Forecast – Gains Capped by Threat of Fed Front-Loading Rate Hike Threat
The Australian and New Zealand Dollars are trading slightly lower early Thursday despite robust Aussie employment data overnight and a Reserve Bank of New Zealand (RBNZ) rate hike earlier in the week.
The price action suggests Aussie and Kiwi traders are more worried about what the Fed is going to do at its July 26-27 monetary policy meeting, following Wednesday’s red-hot consumer inflation report. Traders are being primarily guided by the direction of U.S. Treasury yields, demand for the U.S. Dollar and risk sentiment.
At 05:51 GMT, the AUD/USD is trading .6749, down 0.0008 or -0.12% and the NZD/USD is at .6115, down 0.0017 or -0.28%. On Wednesday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) is at $66.89, down $0.06 or -0.09%.
Two-Sided Reaction to US Consumer Inflation Report
The Aussie and Kiwi posted a volatile two-sided trade following a U.S. consumer inflation report that showed annual consumer prices jumped 9.1% in June, the sharpest spike in more than four decades. The price action suggests traders now expect the Fed to front-load rates more, but not necessarily tighten more overall.
Traders Debating Size of Next Federal Reserve Rate Hike
Shortly after the release of the U.S. inflation data, the debate began. Will the Fed raise rates 75-basis points or 100-basis points at its July 26-27 monetary policy meeting?
Financial market traders ramped up bets that the Fed could raise rates by 100 basis points with a hike of at least 75 basis points seen as a certainty.
Atlanta Fed President Raphael Bostic Added Weight behind the speculation, saying the higher-than-expected inflation print puts a full-point increase on the table.
Additional support for the aggressive move by the Fed was provided by the Bank of Canada, which lifted its benchmark a full percentage-point.
Short-Term Outlook
Today’s early weakness in the Australian Dollar and the New Zealand Dollar identifies the two key factors that are likely to keep a lid on the two currencies.
Australia’s labor market report shows its economy is essentially at full employment. Coupled with inflation running red-hot the Reserve Bank of Australia (RBA) is widely expected to keep raising interest rates following last week’s half point hike to 1.35%. Traders are now pricing in another 50 basis point lift in August.
On Wednesday, the Reserve Bank of New Zealand raised its Official Cash Rate (OCR) by 50-basis points.
Although rate hikes are generally accepted as hawkish and good for a currency, in Forex trading, one has to consider the counter-party, in this case the U.S. Dollar.
A 75-basis point or 100-basis point rate hike by the Federal Reserve will more than offset the RBA’s and the RBNZ’s 50-basis point rate hikes. Since money tends to seek the highest return, this rate hike differential favors the U.S. Dollar. Although we expect to see a few short-covering rallies, the AUD/USD and NZD/USD are going to have a hard time mounting a strong rally if the Fed continues on its aggressive rate-hiking path.
Furthermore, the threat of a recession is likely to weigh on demand for riskier assets like stocks and commodity-linked currencies. Additionally, a recession will increase the safe-haven appeal of the greenback.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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