AUD/USD and NZD/USD Fundamental Daily Forecast – Interest Rate Differential Supporting Australian Dollar
The Australian and New Zealand Dollars finished higher on Wednesday, helped by dovish remarks from U.S. Federal Reserve Chair Janet Yellen. Her comments before the U.S. Senate Banking Committee signaled the Fed was neither in a rush to raise interest rates nor interested in taking them very high.
The AUD/USD settled the session at .7676, up 0.0040 or +0.52% and the NZD/USD closed at .7259, up 0.0035 or +0.48%.
While most Fed officials believe the current muted inflation figures are probably transitory, Yellen sparked a few concerns when she expressed concerns about inflation and hinted that perhaps it may not be transitory factors pressuring inflation.
“Temporary factors appear to be a work. It’s premature to reach the judgment that we’re not on the path to 2 percent inflation over the next couple of years. As we indicate in our statement, it’s something we’re watching very closely, considering risks around the inflation outlook,” Yellen said, during a question-and-answer session.
Based on Yellen’s comments about inflation, investors will be closely watching Thursday’s U.S. Producer Inflation report and Friday’s U.S. Consumer Inflation report. Softer-than-expected reports should be bullish for the Aussie and the Kiwi.
Forecast
Both the AUD/USD and NZD/USD are trading higher on Thursday on the back of better-than-expected Chinese trade figures, which indicated strong foreign demand for the country’s goods as well as resilient domestic demand.
In June, Chinese exports posted an 11.3 percent increase from a year ago and a 17.2 percent rise in imports over the same period in dollar terms. China’s trade balance stood at $42.77 billion for the month, higher than the $42.44 billion forecast.
Analysts also expected exports to rise 8.7 percent while imports were predicted to rise 13.1 percent.
Yellen is set to deliver a second day of testimony on Thursday. She may continue to be grilled about the direction of interest rates in the wake of her comments about the impact of low inflation on Fed monetary policy.
Traders will also continue to monitor the spread between U.S. and Australian 10-year government bond yields. U.S. bond yields fell on Wednesday after Yellen’s remarks, widening the interest rate differential. The spread had been narrowing lately because of the divergence of Fed and Reserve Bank of Australia monetary policy.
The spread narrowed to just 16 basis points in late May. The spread is now up to 37 basis points. This is what is providing the support for the Australian Dollar. If it continues to rise then the AUD/USD will continue to move higher with its November 18, 2016 top at .7777 the next major upside target. If the spread starts to narrow again then look for weakness in the AUD/USD.
Yellen’s testimony and the U.S. inflation data will have a lot to say about the direction of U.S. Treasury yields, the spread between U.S. and Australian yields and the direction of the AUD/USD and NZD/USD the next two days.
This article was originally posted on FX Empire
