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AUD/USD and NZD/USD Fundamental Daily Forecast – Aussie CPI Expected to Stay Below RBA Target

James Hyerczyk

The Australian and New Zealand Dollars finished higher on Tuesday with the Aussie outperforming the Kiwi. The Australian Dollar’s strength was fueled by the hopes of a trade deal between the United States and China. Australia’s economy is highly correlated to China’s and on Monday, U.S. President Donald Trump said he expected to sign a significant part of the trade deal ahead of schedule.

On Tuesday, the AUD/USD settled at .6866, up 0.0027 or +0.40% and the NZD/USD finished at .6356, up 0.0007 or +0.11%.

A weaker U.S. Dollar also contributed to the rise in the Aussie and Kiwi. The greenback fell after data showed U.S. consumer confidence weakened in October. In the U.S. on Tuesday, the Conference Board reported that Consumer Confidence came in at 125.9, below the 128.2 forecast. September’s report was revised higher to 126.3.

RBA Governor Philip Lowe Calls on Business to Invest Now

In a speech early Tuesday, Reserve Bank Governor Philip Lowe effectively ruled out the possibility of cutting its official interest rates below zero and urged business to take advantage of the already historically low borrowing costs.

“It is extraordinarily unlikely that we will see negative interest rates in Australia,” Dr. Lowe said in a prepared speech in Canberra.

Dr. Lowe said negative interest rates were having a “pernicious” effect on the financial system and pensions in Europe. He further added that previously unviable big investments were now making economic sense at current historically low interest rates.

Finally, Lowe reiterated that interest rates in Australia will still have to be kept low for an extended period to reach the goals of full employment and inflation back within the RBA’s 2-to-3 percent target.

Rate Cut Speculation Eased

After the speech, market participants cut back their expectations on further rate cuts from the RBA, a trend that began weeks ago.

From a 50/50 bet at the start of the month that the cash rate would be cut again at the RBA board’s Cup Day meeting, the chance of a cut next week is now priced at just 10 percent.

As well, the 30-day cash rate futures curve no longer has a full 25 basis point cut priced in over the foreseeable future. This represents a change in sentiment that will ease pressure on the RBA to move again quickly.

Australian Consumer Inflation Data On-Tap

At 00:30 GMT, Australia will release its latest report on the Consumer Price Index. It is expected to show a rise of 0.5%, down from the previously reported 0.6%. Trimmed Mean CPI is expected to have risen by 0.4%.

The RBA has signaled the unemployment rate currently sitting at 5.2 percent, needs to fall to 4.5 percent or lower, while today’s report is expected to confirm inflation has again undershot the target band, much as it has for the past five years.

A big miss by the CPI number may raise the chances of a November 5 rate cut. This would put pressure on the AUD/USD.

This article was originally posted on FX Empire