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AUD/USD and NZD/USD Fundamental Weekly Forecast – Brexit Uncertainty Could Weigh on Aussie, Kiwi

James Hyerczyk

The Australian Dollar was pressured early last week as the lack of clarity over the partial deal between the U.S. and China dampened the optimism generated when the agreement was first announced on Friday, October 11.

The Reserve Bank of Australia (RBA) minutes of its last monetary policy meeting on October 1 also weighed on the Aussie Dollar as it showed the interest rate cut was sharply debated among board members with fears it could drive up house prices and fail to deliver a boost to the economy.

The AUD/USD settled last week at .6856, up 0.0063 or +0.92%.

The minutes showed the contentious move was partly driven by concerns the combination of past reductions and the Morrison government’s income tax cuts had fallen short of expectations.

The minutes also showed the main reasons for the October cut were the bank’s concerns unemployment is not low enough to drive up wages and increased economy-wide inflation.

The Australian Dollar started to turn higher late in the week after a report showed Australian employment posted another solid gain in September while the jobless rate dipped for the first time in seven months as fewer people went looking for work, a tentative hint of a much-needed tightening in the labor market.

The Aussie surged on Thursday and Friday to its highest level since September 18 after RBA Governor Philip Lowe’s latest view that a return to near 3 percent economic growth is “quite probable” by next year and that further interest rate cuts should not be assumed.

Financial markets quickly reduced the chance of a back-to-back 0.25 percentage point interest rate cut in November to just 16 percent from almost 50 percent last week.

New Zealand Dollar

The New Zealand Dollar was driven to its highest level since September 16 last week in reaction to quarterly consumer inflation data, the hopes that Britain and Europe may agree on a Brexit deal and after China confirmed it continues to work on a preliminary trade deal with the United States. Traders also reassessed the need for additional rate cuts.

The NZD/USD settled last week at .6386, up 0.0047 or +0.75%.

“My guess is that the market’s reassessing the chances for another easing form the Reserve Bank after November in light of fairy strong non-tradeables inflation, the pick-up in house prices, and commodity prices which are also holding up quite well,” said Imre Speizer, currency strategist at Westpac.

The Reserve Bank of New Zealand’s official cash rate currently stands at 1 percent and the market is expecting it to cut to 0.75 percent at its monetary policy committee’s next meeting on November 13.

The outcome of the Brexit deal vote over the weekend will be crucial in determining how the New Zealand currency trades next week, Speizer says.

Weekly Forecast

There are no major economic releases this week so the direction of the AUD/USD and NZD/USD is likely to be determined by trader reaction to any news about U.S.-China trade relations and Brexit negotiations.

U.S. President Donald Trump on Friday said he thought a trade deal between the United States and China would be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on November 16-17.

Meanwhile, Chinese Vice Premier Liu He said on Saturday, “The two sides have made substantial progress in many fields, laying an important foundation for the signing of a phased agreement. Stopping the escalation of the trade war benefits China, the U.S. and the whole world. It’s what producers and consumers alike are hoping for.”

On Saturday, U.K. Prime Minister Boris Johnson was thwarted by a cross-party group of politicians who voted to postpone the “meaningful vote” on his new divorce deal and force him to ask Brussels for an extension to the current October 31 Brexit deadline.

Johnson grudgingly asked for an extension to the deadline late on Saturday night, but EU leaders don’t necessarily have to accept it.

The special parliamentary session in the House of Commons offered little detail on when, or even if, Britain will finally exit the European Union.

U.S.-China trade relations seem to be moving along enough to provide support for the AUD/USD and NZD/USD, which makes Brexit negotiations the wildcard.

Some traders see the current events as positive since the process is moving forward. Analysts at Deutsche Bank said “the outlook for a Brexit resolution remains constructive.”

Capital Economics called Saturday’s vote “a decent result for the economy and the pound as it makes a no deal Brexit on 31st October even less likely.” But it added that “it does extend the uncertainty that has been hampering growth for at least a bit longer.”

I think the Brexit vote has made the situation a little complicated, which is likely to encourage longs to pair positions, and maybe a few more shorts to re-emerge.

This article was originally posted on FX Empire

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