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AUD/USD and NZD/USD Fundamental Weekly Forecast – Narrowing Interest Rate Differential Bearish for Aussie, Kiwi

The Australian and New Zealand Dollar’s fell sharply last week on concerns over Chinese demand for raw materials. Both currencies were pressured by disappointing data on Chinese retail sales and industrial production.

The AUD/USD settled at .7564, down 0.0092 or -1.20% and the NZD/USD closed the week at .6812, down 0.0114 or -1.64%.

AUDUSD
Weekly AUD/USD

The Aussie was also pressured by a disappointing labor report. The Employment Change came in at 3.7K, below the 17.8K estimate. The Unemployment rate, however, dropped to 5.4%.

The Australian Wage Price Index also came in below expectations at 0.5%. Traders were looking for an increase of 0.7%.

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The only bright spot last week was the NAB Business Confidence report that came in at a solid 8, indicating increasing confidence in the economy from business leaders.

The Kiwi continued to feel pressure from the change in government and its possible impact on monetary policy. The Business NZ Manufacturing Index came in nearly unchanged at 57.2. Quarterly PPI Input came in a disappointing 1.0% higher versus an estimate of 1.2%.

NZDUSD
Weekly NZD/USD

Forecast

Weaker commodity prices should continue to weigh on the AUD/USD and NZD/USD. Oversold conditions could limit losses and may even trigger a periodic short-covering rally.

The New Zealand Dollar is especially vulnerable to further weakness because of the drop in commodity prices. The CRB Index of 19 commonly traded commodities has fallen more than 2 percent in the past week, while prices of dairy products have declined in the past three GlobalDairyTrade auctions.

Over the near-term, traders will be watching for developments on U.S. tax reforms, with progress potentially seen helping the U.S. Dollar.

Finally, the favorable yield differential enjoyed by the Australian and New Zealand Dollars has tightened to its lowest level in over 17 years, undermining their appeal as carry trades. This is helping to make the U.S. Dollar a more favorable investment.

This week’s price action is a tough call because of the U.S. Thanksgiving holiday on November 23. Traditionally, this is a low volume, low volatility week.

The holiday-shortened week in Washington likely means there won’t be any activity involving tax reform with the U.S. Senate likely to pick up the issue when it returns to the Capital next week.

In other news, traders will get the opportunity to react to a speech by Fed Chair Janet Yellen on Tuesday. On Wednesday, the U.S. reports on Core Durable Goods. The report is expected to show an increase of 0.4%. The Federal Open Market Committee will release its meeting minutes at 1900 GMT.

The minutes are expected to provide insight into the Fed’s plans to raise rates in December which the market feels is a done deal.

Uncertainty over tax reform is likely to continue to underpin the market, but rising rates are expected to limit gains. This means we’re likely to continue to see a rangebound trade over the near-term. However, due to the low volume and thin trading conditions this week, traders should be prepared for surprise volatility in either direction, and possible counter-trend price action at times.

This article was originally posted on FX Empire

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