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AUD/USD and NZD/USD Fundamental Weekly Forecast – Tax Reform Issue Could Fuel Aussie, Kiwi Short-Covering Rally

James Hyerczyk

Despite a mostly sideways trade on the daily chart, the Australian Dollar still managed to eke out a small weekly gain. Oversold technical conditions and a weaker U.S. Dollar underpinned the New Zealand Dollar most of the week.

The AUD/USD settled at .7656, up 0.007 or +0.09%. The NZD/USD finished the week at .6926, up 0.0020 or +0.28%.

Weekly AUDUSD

Early in the week, the Reserve Bank of Australia left its benchmark interest rate unchanged at 1.50%. Later in the week, the RBA slightly downgraded its outlook for economic growth in Australia while signaling only a gradual rise in headline inflation.

In its quarterly statement on monetary policy, the central bank said it sees growth in December 2017 of 2.5 percent easing back from 2 to 3 percent in the previous forecast issued in August.

Additionally, in December 2018, the RBA sees economic growth of 3.25 percent, down from a previously forecast peak of 3.75 percent.

The RBA also forecast the economy growing at “a solid pace” over the next few years due positive labor market developments. However, the RBA is more concerned about inflation and wages growth with the central bank warning that both will rise “only gradually over time”.

Due to the weaker outlook for rising inflation, the Reserve Bank will leave its cash rate on hold at the historic low of 1.5 percent indefinitely.

The Reserve Bank of New Zealand left its Official Cash Rate on hold at 1.75%, as widely expected.

Acting Governor Grant Spencer reiterated the same message the RBNZ had been giving all year; the housing market is cooling, inflation is muted and the economy is steadily improving.

“Global economic growth continues to improve, although inflation and wage outcomes remain subdued,” Mr. Spencer’s statement said.

“Annual CPI inflation was 1.9 percent in September although underlying inflation remains subdued. Overall, CPI inflation is projected to remain near the midpoint of the target range and longer-term inflation expectations are well anchored at 2 percent.”

Finally, the RBNZ left its policy statement intact. “Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Weekly NZDUSD

Forecast

Another dip in U.S. Treasury yields could make the Aussie and Kiwi more attractive this week as it could encourage investors to adjust their current short positions.

The major report affecting the Australian Dollar will be the Employment Change report. Australian Employment Change is expected to show an 18.9K increase versus the previous 19.8K. The Unemployment Rate is expected to come in unchanged at 5.5%.

New Zealand quarterly PPI Input and PPI Output are also on tap. Last quarter they came in at 1.4% and 1.3% respectively.

Traders will also get the opportunity to react to the latest U.S. economic data on Producer Inflation, Consumer Inflation, Retail Sales and Building Permits. Fed Chair Janet Yellen is also expected to speak on Tuesday.

Despite the number of reports and speeches, the key market driving force will be the tax reform issue. This could influence the AUD/USD and NZD/USD until the end of the year.

This article was originally posted on FX Empire

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