AUD/USD and NZD/USD Fundamental Weekly Forecast – Set-up for Steep Fall Amid Bleak China Outlook, Hawkish Fed

The Australian and New Zealand Dollars took a beating last week amid worries over China economic growth and as hawkish talk of higher U.S. interest rates lifted the U.S. Dollar. Domestic events also weighed on the currencies.

The Aussie Dollar was also pressured by a sharp drop in the Chinese Yuan. The Aussie is often sold as a liquid proxy for the Chinese currency, reflecting China’s position as the largest buyer of Australian resources.

Last week, the AUD/USD settled at .6876, down 0.0247 or -3.58% and the NZD/USD finished at .6175, down .0279 or -4.53%. The Invesco CurrencyShares Australian Dollar Trust ETF (FXA) closed at $68.11, down $2.43 or -3.44%.

Gloomy Outlook for China Sets Early Bearish Tone

The AUD/USD and NZD/USD were pressured from the get-go last Monday after the release of economic data that painted a bleak picture of the Chinese economy. The data along with a significant Peoples’ Bank of China (PBoC) tightening are the key reasons why traders are expecting a slowdown in the global economy.

The weakness in China’s economy undermined commodities which are the life blood of the Australian and New Zealand economies. The Aussie Dollar was especially hurt by plunging iron ore, copper and gold prices.

Confusingly Mixed Australian Employment Data Weighs on Aussie

Australian jobs figures proved confusingly mixed rather than clearly strong as hawks had hoped for, leaving the market split on the likely size of near-term rate hikes.

Australian data showed jobs badly missed forecasts with a drop of 40,900 in July, yet the unemployment rate still fell to a fresh 48-year low of 3.4%.

The labor market report may have been a relatively weak one, none-the-less, the labor market remains the strongest part of the economy.

RBNZ Lifts Official Cash Rate as Expected

The Kiwi failed to get much of a lift last week after the Reserve Bank of New Zealand (RBNZ) not only raised its cash rate (OCR) by 50% basis points to 3.0%, but also signaled it wanted to get to a restrictive 4.0% before pausing.

Investors now see rates at 4.0% by April at the latest, though they also doubt the RBNZ will be able to keep them that high for all of 2023 as projected.

Weekly Forecast

The domestic data is a little on the light side this week with Australia releasing data on Manufacturing and Services PMI on Tuesday, followed by New Zealand Retail Sales on Wednesday.

The rest of the week, the focus will be on any commentary coming from the central bankers’ symposium at Jackson Hole. Specifically, investors are hoping to get a better read on the Fed’s likely actions in coming months next Friday, August 26, when Fed Chair Jerome Powell gives a highly anticipated speech on the economic outlook at the conference.

Look for continued pressure on the Australian and New Zealand Dollars if U.S. Treasury yields and the U.S. Dollar continue to rise in anticipation of aggressive Fed rate hikes.