Yahoo Finance AUD/USD and NZD/USD Fundamental Weekly Forecast – Interest Rate Differential Driving Direction
The Australian and New Zealand Dollars finished higher last week with much of the support being generated by a plunge in U.S. Treasury yields, which drove down demand for the U.S. Dollar. Rising expectations of a U.S. Federal Reserve rate cut also tightened the spread between U.S. Government bonds and Australian and New Zealand Government bonds, driving up demand for the Aussie and Kiwi as short-sellers continued to adjust their positions.
Last week, the AUD/USD settled at .7003, up 0.0065 or +0.93% and the NZD/USD closed at .6664, up 0.0127 or +1.94%.
Tightening Interest Rate Differential
U.S. Treasury yields continued to fall last week, bringing them closer to yields in Australia and New Zealand. Yields fell in the U.S. as investors continued to price in the increasing possibility of a sooner-than-expected rate cut by the Fed due to a weakening U.S. economy.
Early in the week, yields fell after remarks from Fed Chair Jerome Powell opened the door to easier monetary policy. On Friday, yields fell further after the U.S. government said the economy added far fewer jobs than expected during the month of May.
The 2-year Treasury note, which closely reflects Fed policy, was yielding 1.779% Friday morning, well off the 2.25% it reached in late May. The yield on the benchmark 10-year Treasury note was lower at 2.055%, while the yield on the 30-year Treasury bond was down to around 2.571%.
Additionally, market expectations for a Fed rate cut in June rose to 27.5% from 16.7%, according to the CME Group’s FedWatch tool. The market is also pricing in a 79% chance of lower Fed rates by July.
Aussies Cut Rates
As widely expected, the Reserve Bank of Australia cut its benchmark interest rate by 25 basis points to 1.25% on June 4, its first rate cut in around three years. The 10-year Australian government bond traded at 1.53% after the rate cut, more than a percentage point lower than its November high of 2.78%.
In a speech that followed the rate cut, RBA Governor Philip Lowe said the move would boost inflation and reduce unemployment. It was also reported that Australia’s GDP grew just 0.2% in the last quarter of 2018 and its annual growth rate has slowed to 1.7%.
Weekly Forecast
Early in the week, we’ll be watching the reaction by Treasury traders to the news of the postponement of U.S. tariffs against Mexico that were supposed to start on Monday, June 10. This could ease pressure on the economy and encourage long bond investors to take profits. Since they move inverse to bond prices, yields could rise, making the U.S. Dollar a more attractive asset.
In the U.S., the focus will be on U.S. consumer inflation. On Wednesday, the CPI report is expected to show an increase of 0.1%. Core CPI is expected to have risen by 0.2%. Lower than expected readings will likely solidify a rate cut in either June or July. This could help boost the AUD/USD and NZD/USD.
Retail Sales and Core Retail Sales are due out on Friday. Traders expect a 0.5% and 0.7% increase respectively. Lower figures will raise concerns about the strength of the economy.
In Australia, investors will get the opportunity to react to the latest data on Employment Change and the Unemployment Rate. The economy is expected to have added 16K jobs in May. The Unemployment Rate could dip from 5.2% to 5.1%.
Weaker than expected Australia jobs data could drive the AUD/USD sharply lower.
This article was originally posted on FX Empire
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