AUD/USD and NZD/USD Fundamental Daily Forecast – Pressured by US Dollar Recovery, Drop in Bond Yields

The Australian and New Zealand Dollars are under pressure on Friday after both currencies suffered a loss the previous session due to a stronger U.S. Dollar. One catalyst behind the weakness is the news that the Bank of England passed on raising interest rates as expected by market participants. The move drove interest rates lower around the world.

At 06:08 GMT, the AUD/USD is trading .7388, down 0.0012 or -0.17% and the NZD/USD is at .7087, down 0.0016 or -0.23%.

Reuters is reporting that both the Aussie and the Kiwi suffered collateral damage when the BOE on Thursday stunned markets by skipping a chance to raise interest rates. That triggered a sharp unwinding of long Sterling/short U.S. Dollar positions, which lifted the U.S. currency across the board.

Australian Dollar Struggles after Release of Dovish RBA Quarterly Economic Update

The Reserve Bank of Australia said earlier in the session that it expects the economy to recover quickly from a deep pandemic-induced contraction last quarter, while having to lift its outlook for inflation as global supply pressures have a greater impact than first thought.

In a quarterly round up of the economy, the RBA conceded inflation had returned to its 2-3% target  band a full two years earlier than expected, forcing it to abandon a commitment to keeping bond yields super-low, Reuters reported.

Policymakers also walked back on projections that interest rates would not rise until 2024, saying a hike in 2023 was now plausible given the economy was on the road to recovery.

While coronavirus lockdowns saw activity shrink sharply in the third quarter, world-beating vaccination rates have since allowed the economy to reopen and consumption has roared back.

“A rapid bounce back in domestic demand is forecast in the December and March quarters as restrictions are further eased,” the RBA said in its 71-page report.

It now sees gross domestic product (GDP) at an annual 3% by the end of this year, down from 4% previously, but boosted 2022 by more than a percentage point to a heady 5.5%.

The path for core inflation had been lifted markedly so it now sits at 2.25% for the end of this year, up from the previous prediction of just 1.75%. Yet, further progress is seen as gradual so that inflation only reaches 2.5% by the end of 2023.

Crucial to that outlook is wages growth, which has lagged badly for years and held inflation below target. The RBA argues wages need to grow at an annual 3% or more to keep inflation in the target band, but it only expects to reach that in late 2023.

It was this restrained forecast that led RBA Governor Philip Lowe to say a rate rise next year was “extremely unlikely”, even though financial markets are pricing a move as early as July.

Indeed, futures and swaps imply the current 0.1% cash rate will be approaching 1.0% by the end of 2022, and 1.5% at the end of 2023.

Daily Forecast

The focus now shifts to Friday’s U.S. Non-Farm Payrolls report. On Thursday, U.S. jobless claims totaled 269,000 for the week ended October 30, better than the 275,000 expected by economists polled by Dow Jones. On Wednesday, the ADP National Employment Report showed private employment increased by 571,000 jobs last month after advancing by 523,000 in September.

On Friday, the U.S. Bureau of Labor Statistics report is expected to show the Non-Farm Employment Change was 455K. The Unemployment Rate fell to 4.7% and Average Hourly Earnings rose 0.4%.

A stronger than expected U.S. labor market report will bring the Federal Reserve closer to a rate hike so look for the AUD/USD and NZD/USD to feel more downside pressure.