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AUD/USD and NZD/USD Fundamental Weekly Forecast – Expected Heightened Volatility as Investors Return from Holiday Break

James Hyerczyk
Since there are no major reports this week from Australia and New Zealand, the price action in the Australian and New Zealand Dollars is likely to be largely influenced by heightened stock market volatility and U.S. Treasury yields. They should also provide direction for the U.S. Dollar. Economic reports from China could also move the Aussie and Kiwi.

The Australian and New Zealand Dollars finished mixed last week despite the weaker U.S. Dollar and lower demand for risk. Volatility and trading volume were low as the major players remained on the sidelines due to the holidays. The U.S. Dollar finished lower against a basket of major currencies with most of the selling pressure fueled by a steep rise in demand for safe-haven currencies.

Last week, the AUD/USD settled at .7039, up 0.0007 or +0.10% and the NZD/USD finished the week at .6707, down 0.0005 or -0.07%.

The price action in the Aussie and Kiwi suggests investors may be torn between conflicting fundamentals. Falling U.S. Treasury yields may be encouraging investors to buy the two currencies, but lower demand for risky assets may be limiting gains. Furthermore, the outlook for the Australian and New Zealand economies may be encouraging investors to price in the possibility of rate cuts in 2019 by the Reserve Bank of Australia and the Reserve Bank of New Zealand.

In the U.S. last week, Treasury yields fell once again as investors took protection against concerns over excessive stock market volatility. In addition to the stock market’s wild swings, investors continued to seek shelter from a number of issues causing uncertainty in the financial markets. These included a lack of confidence in the U.S. Federal Reserve, the ongoing partial government shutdown in Washington and worries over a possible U.S. recession. Investors also aren’t sure whether U.S. and China negotiators will be able to hammer out a new trade agreement by the self-imposed March 1 deadline.

Forecast

Since there are no major reports this week from Australia and New Zealand, the price action in the Australian and New Zealand Dollars is likely to be largely influenced by heightened stock market volatility and U.S. Treasury yields. They should also provide direction for the U.S. Dollar. Economic reports from China could also move the Aussie and Kiwi.

The week starts with minor reports from Australia and China. Australian Private Sector Credit is expected to come in at 0.3%. Chinese Manufacturing PMI is forecast at 50.0 and Non-Manufacturing PMI at 53.2. The Australian Dollar could get hit hard if the Manufacturing PMI comes in below 50.

Early Wednesday, China will release the Caixin Manufacturing PMI report. It is expected to come in at 50.3. Once again a reading under 50 will be bearish for the Aussie Dollar. Caixin Services PMI will be released on Friday. It is expected to come in at 53.1.

Australia will also release a report on Commodity Prices. New Zealand will release its latest GDT Price Index report.

The major reports that could move the Australian and New Zealand Dollars come later in the week. The first key report is ISM Manufacturing PMI. It is expected to come in at 58.2, slightly below the previously reported 59.3.

The major report on Friday will be the December U.S. Non-Farm Payrolls report. It is expected to show the economy added 181K jobs, up from 155K. The unemployment rate is expected to remain steady at 3.7%. Average Hourly Earnings is forecast to have risen by 0.3%.

Since the market seems to think the economy is not as strong as the Fed surmises, the jobs report could offer some major insights into the central bank’s next move on interest rates.

A stronger than expected jobs report will support the Fed’s notion that the economy is strong and needs to be tamed with consistent rate hikes. A weaker than expected report will throw more support towards a weakening economy.

The Fed’s stance on future rate hikes may be clarified on Friday at 1515 GMT when Fed Chair Jerome Powell delivers a speech at an economic conference. Risk appetite could deteriorate further if Powell comes across as hawkish. This could drive the Aussie and Kiwi lower.

This article was originally posted on FX Empire

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