Yahoo Finance AUD/USD and NZD/USD Fundamental Daily Forecast – Could See Further Short-Covering if Treasury Yields Continue to Plunge
The Australian and New Zealand Dollars are trading slightly better on Tuesday, courtesy of another drop in U.S. Treasury yields. However, the early moves are not that impressive given that dovish monetary policies by both the Reserve Bank of Australia and the Reserve Bank of New Zealand continue to exert overhead pressure.
At 08:26 GMT, the AUD/USD is trading .6918, up 0.0002 or +0.01% and the NZD/USD is at .6551, up 0.0006 or +0.01%.
We have two scenarios developing at this time. The main down trend in both the Aussie and the Kiwi are being fueled by expectations of rate cuts by the RBA and RBNZ. Given the size of the bets on this occurring, it is going to take a dramatic change in policy to turn the currencies bullish.
In the U.S., we are seeing further evidence that Treasury investors are increasing bets for a Fed rate cut later this year. Traders are looking for a further deterioration in the U.S. economy because they expect damage from the prolonged U.S.-China trade dispute.
On May 23, Treasury yields plunged after the U.S. released a report showing weaker-than-expected manufacturing PMI data. This triggered a huge counter-trend rally in the New Zealand Dollar and a reasonable short-covering rally in the Australian Dollar.
Now we know that the moves were just position-squaring and short-covering in reaction to the drop in yields. However, if yields continue to plunge or if U.S. economic data, especially on labor and inflation, continue to weaken, Aussie and Kiwi short-sellers will be forced to make a decision: cover their positions in anticipation of a weaker U.S. Dollar, or increase their short positions on the idea that a weakening U.S. economy will eventually spread overseas to Australia and New Zealand.
We’re anticipating heightened volatility in both the AUD/USD and the NZD/USD as the situation developments throughout the rest of the year. We’re likely to see waves of selling related to RBA and RBNZ dovish activity, and potential waves of buying or short-covering if the U.S. economy starts to turn south, or if the Fed turns dovish and hints at a rate cut later this year.
Later today, investors will get the opportunity to react to U.S. reports on Home Price Index, S&P/CS Composite-20 HPI and Consumer Confidence. Keep an eye on the consumer confidence report. It’s one of the Fed’s favorites. Traders are looking for a reading of 130.1, up from 129.2. This report from the Conference Board could shake up the markets if it comes in lower than expected. We get a chance to see if the escalation of tensions between the U.S. and China has spread to the consumer.
This article was originally posted on FX Empire
