New Zealand Markets closed

AUD/USD and NZD/USD Fundamental Daily Forecast – RBNZ Dovish, but Hints Currency May Be Overvalued

James Hyerczyk

The New Zealand and Australian Dollars are trading lower shortly before the U.S. opening. The early trade has been volatile and two-sided. Influencing the trade has been the tensions between the United States and North Korean, and the Reserve Bank of New Zealand’s interest rate and monetary policy decisions.

The latest developments show that North Korea has dismissed warnings by President Trump that it would face “fire and fury” and outlined detailed plans for a missile strike on Guam. There has been no official response from Washington to this latest remark from North Korea, but unofficial news is claiming the U.S. Pentagon is developing a plan for a pre-emptive strike on North Korea.

Daily AUDUSD

North Korea regularly threatens to destroy the United States and its allies so this is nothing new. Investors just have to be prepared for the worst. If there is an attack then, the AUD/USD and NZD/USD are likely to plunge because money would leave higher-yielding assets and seek shelter in lower-yielding, lower-risk assets like U.S. Treasury instruments, gold, the Japanese Yen and the Swiss Franc. I think that’s all we need to know at the moment. The rest is just a guess.

Daily NZDUSD

Reserve Bank of New Zealand

The RBNZ left the official cash rate at 1.75 percent as expected. Initially, the New Zealand Dollar rallied after the Reserve Bank continued to hint that it expects to begin raising its benchmark OCR next year.

Governor Graeme Wheeler said economic growth was expected to pick up in the coming months, supported by strong net migration, low interest rates and spending outlined in the May budget.

But Wheeler, who leaves the job next month, said headline inflation was likely to decline and the outlook for tradables inflation was weak.

The NZD/USD rose on this news because economists had expected rates to remain low until about 2020. Based on this assessment, the RBNZ was not as dovish as expected.

The RBNZ also said it favored a lower New Zealand dollar, although it avoid strong language. It later noted the central bank had the capability to intervene in the foreign exchange market. The central bank went on to blame the rise in the currency to a weaker U.S. Dollar and said that a lower dollar would help increase tradables inflation and achieve more balanced growth.

Forecast

Although AUD/USD and NZD/USD traders are likely to remain focused on the U.S.-North Korean situation, there are a few economic reports that could garner a response from U.S. Dollar and currency traders.

U.S. producer inflation is expected to come in at 0.1%, unchanged from the previous month. Core PPI is expected to rise by 0.2%. Weekly unemployment claims are expected to come in at 240K, the same as last week.

This article was originally posted on FX Empire

More From FXEMPIRE: