AUD/USD and NZD/USD Fundamental Weekly Forecast – Cancellation of Trade Talks by China Could Weigh on Aussie, Kiwi

James Hyerczyk
While an easing of trade tensions between the United States and China may have been the catalysts behind last week’s rally in the Aussie and Kiwi, the possibility of renewed concerns could take the currencies lower early this week. This is because late Friday, China announced it was cancelling its meeting with the U.S., and wouldn’t resume negotiations until after the November U.S. mid-term elections.

The Australian Dollar, a proxy of China-related trades as well as gauge of risk sentiment, climbed to a three-week high last week. It also produced its biggest weekly advance in 14 months. Additionally, S&P Global Ratings revised its outlook on triple-A rated Australia to stable from negative on Friday, providing the Aussie with a further lift.

The AUD/USD settled at .7288, up 0.0133 or +1.86%.

In its monetary policy minutes, the Reserve Bank of Australia (RBA) warned on risks to its outlook from U.S.-China trade tensions and weak wages, while reaffirming its next interest rate move would likely be a hike.

The RBA also said “Significant tensions” around trade policy are a “material risk” to the global outlook. Unemployment is expected to decline gradually toward 5 percent and wage growth is expected to increase gradually as spare capacity in the labor market is absorbed.

Additionally, GDP growth is likely to remain “above potential” through the forecast period and inflation is “likely to increase over time”.

Finally, the minutes reiterated there was “no strong case” for a near-term adjustment to monetary policy.

New Zealand Dollar

Besides the easing of tensions over the trade dispute between the U.S. and China, the New Zealand Dollar was boosted after data showed its economy grew at a faster pace than expected in the second quarter.

Gross domestic product rose 1 percent quarter on quarter in the three months through June, according to Stats NZ, up from 0.5 percent in the first quarter and ahead of a median forecast of 0.7 percent.

The NZD/USD finished the week at .6680, up 0.00134 or +2.05%.

Forecast

While an easing of trade tensions between the United States and China may have been the catalysts behind last week’s rally in the Aussie and Kiwi, the possibility of renewed concerns could take the currencies lower early this week. This is because late Friday, China announced it was cancelling its meeting with the U.S., and wouldn’t resume negotiations until after the November U.S. mid-term elections.

While certainly not a deal breaker, it does raise questions about the relationship between the two countries, and may even force investors to question the validity of last week’s rally. This could encourage profit-taking, position-squaring or even outright shorting of the AUD/USD and NZD/USD this week.

Also contributing to the movement in the Aussie and Kiwi will be the outcome of this week’s two-day Federal Open Market Committee meeting which culminates with the Fed’s interest rate and monetary policy decision on Wednesday, September 26.

Although the Fed is widely expected to raise its benchmark interest rate during the meeting, Australian and New Zealand Dollar traders will be primarily focused on the direction the Fed will chart ahead. Traders essentially want to know how aggressive the Fed will be in increasing rates in the future.

The 25-basis point increase to the federal funds rate is already priced into the market. The hike will push the funds target to 2 percent to 2.25 percent, where it last was more than 10 years ago.

Since the rate hike has already been factored into the dollar and the currencies, traders will be paying more attention to any information that shows how much more monetary tightening will be necessary to keep the economy (and inflation) healthy.

The AUD/USD and NZD/USD could be supported if the Fed appears to be too “dovish” in its assessment of the need for additional rate hikes. In other words if it drops the word “accommodative” from its monetary policy statement.

Also in the U.S., traders will get the opportunity to react to the latest data on consumer confidence, durable goods and gross domestic product.

In New Zealand, the focus will be on business confidence and the interest rate and monetary policy decisions by the Reserve Bank of New Zealand (RBNZ). The Reserve Bank is widely expected to leave its benchmark interest rate at 1.75%.

This article was originally posted on FX Empire

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