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AUD/USD and NZD/USD Fundamental Weekly Forecast – Stimulus May Take Backseat to US Presidential Election

James Hyerczyk
·3 min read

The Australian and New Zealand Dollars finished higher last week, helped by a weaker U.S. Dollar which tumbled amid hopes for a new U.S. stimulus package. Negotiations between Republicans and Democrats continued all week but they were unable to reach a compromise deal by the end of the week. Earlier in the week, both currencies tested major support that if broken would have done severe damage to the daily and weekly charts.

Last week, the Australian Dollar settled at .7136, up 0.0059 or +0.84% and the New Zealand Dollar finished at .6691, up 0.0086 or +1.31%.

The Aussie and Kiwi owed most of their rally to the plunging greenback than any domestic activity, with the Australian Dollar still vulnerable to further policy easing from the Reserve Bank of Australia (RBA) at its November 3 meeting and the New Zealand Dollar feeling the pressure of continued talk of negative interest rates next year by the Reserve Bank of New Zealand policymakers.

RBA Minutes Showed Policymakers Talked About Further Monetary Easing

The Reserve Bank of Australia (RBA) discussed the possibility of further monetary easing at its October board meeting, including cutting the cash rate towards zero and buying longer-dated government bonds, minutes of its most recent meeting showed last Tuesday.

RBA board members noted larger balance sheet expansions by other central banks had led to lower sovereign yields in most other rich nations, minutes of the October 6 meeting showed.

Board members also discussed implications for the exchange rate, providing the clearest sign yet the RBA will likely soon cut rates further and expand its massive bond buying campaign, to lower both borrowing costs and the local dollar.

Ahead of the minutes, RBA Assistant Governor Chris Kent said one of the monetary tools for the board was to buy bonds further out the yield curve.

“Those purchases further out could occur on a regular basis…and the intention there is to bring down the longer end of the yield curve that would reduce funding costs,” Kent sent in reply to a Reuters query at an event in Sydney.

“It will also probably have some additional portfolio balancing effects, including on the exchange rate.”

Weekly Forecast

The fiscal stimulus talks are a wildcard at this point. Deadlines have been set, passed and reset again. I believe the stimulus aid will eventually be approved, but the timing is unknown at this point. Furthermore, the focus for traders could shift from stimulus to the U.S. presidential election coming up on November 3.

Australia will report quarterly CPI data on Wednesday. It is expected to have improved from -1.9% to 1.5%. Trimmed Mean CPI is expected to have improved from -0.1% to 0.3%.

Some investors will also be looking ahead to the November 3 RBA meeting. The RBA has held its cash rate at a record low 0.25% since can emergency 50 basis points (bps) cut in mid-March. However, economists widely predict the RBA will trim the rate at its November 3 policy meeting by 15 bps to 0.1%. This move, coupled with the buying of bonds further out the yield curve should be enough to keep the pressure on the Aussie Dollar.

Buying long-dated bonds is one way that central bank policymakers would reduce funding costs.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire