AUD/USD and NZD/USD Fundamental Weekly Forecast – Traders Focusing On US-China Trade Relations

The Australian and New Zealand Dollars were driven sharply lower last week by a combination of negative news about U.S-China trade relations, lower demand for risky assets and weaker-than-expected Australian economic data.

The Reserve Bank of Australia extended its record-breaking streak of inaction on rates, holding the official cash rate at 1.5 percent for a 28^th consecutive month ahead. The RBA maintained a positive stance on the labor market, citing a pick-up in wages growth last month. However, it cooled its language around trade noting “some signs of a slowdown” and declines in commodity prices.

Australian Retail Sales came in at 0.3% as expected. The previous report was revised down to 0.1%.

The Aussie plunged after GDP came in well-below expectations. This reduced the odds of a sooner than expected rate hike by the RBA. Quarterly GDP came in at 0.3%, missing the 0.6% forecasts. It was also much lower than the previously reported 0.9%.

There were no major reports from New Zealand.

U.S. stock indexes plunged last week, leading to a dip in demand for riskier currencies, like the Aussie and Kiwi. Some of the selling was related to a steep drop in U.S. Treasury yields.

U.S Treasury markets plunged last week leading to a narrowing of the spread between the 2-year and 10-year yields. This is often interpreted as a warning sign of a recession although it may take years for the economy to weaken enough for a recession to form. Furthermore, the relationship between the 2-year and 5-year Treasurys actually resulted in the formation of an inverted yield curve.

Forecast

The direction of the AUD/USD and NZD/USD this week will likely be determined by investor demand for risk. And this is likely to be controlled by U.S. China relations. There are no major reports from Australia and New Zealand this week.

In the U.S., investors will get the opportunity to react to the Producer Price Index (PPI) on Tuesday.  On Wednesday, the U.S. will release reports on Consumer Price Inflation (CPI). Friday will feature Retail Sales.

Stock market traders are a little nervous ahead of the opening because of simmering tensions between the U.S. and China. Although the two economic powerhouses have a little less than 90 days to reach a trade agreement, concerns were raised last week when Canadian officials arrested the CFO of a major Chinese technology company. Additionally, the U.S. is expected to announce the arrests of Chinese hackers of U.S. technology firms.

Basically, weaker stocks and heightened volatility should keep the pressure on the AUD/USD and NZD/USD. Worsening U.S.-China relations will be the catalyst for renewed selling pressure. If weak U.S. inflation data crushes the U.S. Dollar then the Aussie and Kiwi could mount a strong recovery.