AUD/USD and NZD/USD Fundamental Weekly Forecast – Fed Minutes Should Contain No Surprises

The Australian and New Zealand Dollars finished lower last week with the Aussie appearing on the charts to be the stronger of the two. Both currencies were primarily driven lower by the stronger U.S. Dollar which was bolstered by solid U.S. economic data, rising U.S. Treasury yields and expectations for further rate hikes later this year.

The AUD/USD settled at .7512, down 0.0028 or -0.37% and the NZD/USD finished the week at .6920, down 0.0043 or -0.61%.

Essentially, the divergence between the monetary policies of the U.S. Federal Reserve and the Reserve Banks of Australia and New Zealand is driving the price action. The Fed is hawkish and raising rates, while the RBA and RBNZ have put rate hikes on hold and appear to be in no hurry to raise interest rates until next year.

In Australia, the RBA minutes signaled it would keep rates steady for some time as inflation and wage growth remained subdued. The Wage Price Index rose 0.5%, less than the 0.6% forecast. The Employment Change report showed the economy added 22.5K jobs in April, beating the 19.8K estimate. However, the Unemployment Rate rose slightly from 5.5% to 5.6%.

Both the Australian and New Zealand Dollars were pressured by an easing of tensions over a possible trade war between the United States and China. This event supported the U.S. Dollar.

In the U.S. last week, a government report showed that U.S. retail sales rose at a solid pace in April, a sign that consumers may be rebounding from weak spending earlier this year and driving stronger economic growth.

Building permits came in as expected at 1.35 million units. Housing starts dropped 3.7 percent to a seasonally adjusted annual rate of 1.287 million units in April, the Commerce Department said last Wednesday. The decline reversed March’s rise.

Strong performances were posted by the Empire State Manufacturing Index, Industrial Production and the Philly Fed Manufacturing Index. Business Inventories were weak.

On the slightly weak side, Capacity Utilization came in a little below expectations and Weekly Unemployment Claims rose marginally.

Additionally, the yield on U.S. 10-year Treasury note hit a new multiyear high last week, returning to a level not seen since 2011.

The 10-year yield briefly hit 3.128 percent, its highest level since July 8, 2011 when the note yielded as high as 3.184 percent. The 30-year bond yield also briefly hit a new high; it topped 3.2640 percent overnight, its highest level since October 3, 2014 when the 30-year yielded as high as 3.276 percent.

Forecast

It’s a light week in New Zealand and Australia. New Zealand Retail Sales are expected to rise 1.0%, lower than the previous quarter’s 1.7% gain. In Australia, RBA Governor Lowe is scheduled to speak.

Robust data in the United States has pushed yields higher as investors bet that the Federal Reserve will stay the course to raise rates three times this year. Rising inflation, which threatens Treasury prices because it erodes the purchasing power of their fixed payments, puts upward pressure on rates.

After the Fed already approved a one-quarter point-hike in March, the market is now pricing in a 95 percent chance of a June increase, and a 72 percent chance for September.

This week, investors will get the opportunity to react to the FOMC Meeting Minutes on Wednesday, Core Durable Goods Orders and a speech by Fed Chair Jerome Powell on Friday.

The Fed minutes should contain no surprises especially after the hawkish comments from several Fed officials last week.

Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland expressed support for the gradual increase in U.S. interest rates.

John Williams, president of the Federal Reserve Bank of San Francisco said that the Fed’s era of market hand-holding is nearing an end and that he thinks the time is approaching to phase out forward guidance.

Federal Reserve Bank of Atlanta President Raphael Bostic says he’s aware of the dangers of an inverted yield curve, which in the past has been viewed as a sign of impending recession.

Federal Reserve Bank of Dallas President Robert Kaplan cautioned against speeding up the pace of interest-rate increases by the U.S. central bank, in part due to concerns over a narrowing spread between short-term borrowing costs and longer-term yields.