AUD/USD and NZD/USD Fundamental Forecast – October 21, 2016

Both the Australian and New Zealand Dollars posted potentially bearish technical chart patterns, indicating their current rallies may be over as the focus shifts back to domestic central bank activity and the strength of the U.S. Dollar. The AUD/USD finished the session at .7626, down 0.0097 or -1.26%. The NZD/USD closed at .7191, down 0.0040 or -0.55%.

The Australian Dollar dropped sharply against the U.S. Dollar on Thursday after the release of disappointing local employment data while the Greenback climbed on upbeat U.S. data.

Yesterday’s data showed fulltime employment dropped by 53,000, which was the largest one-month decline since February 2009. There was an increase in part-time work which softened the blow of the weak data, but it wasn’t strong enough to hike the issues with this report. Additionally, a decline in the participation rate helped push the unemployment rate from 5.7 percent to 5.6 percent. The Employment Change was minus 9.8K, well below the 15.2K estimate.

Australian front-end bond yields fell along with the Aussie, suggesting that investors believe that this data may force the Reserve Bank of Australia to take a longer look at the strength of the economy before next month’s policy meeting.

The New Zealand Dollar may have peaked on Thursday with the formation of a dramatic reversal top. Although the currency had been strengthening recently due to oversold conditions and a surprisingly better consumer inflation report, investors didn’t really expect the rally to last due to the strong probability of an interest rate cut in November by the Reserve Bank of New Zealand.

Another catalyst driving the Aussie and Kiwi lower on Thursday was the European Central Bank’s monetary policy decision and comments from ECB President Mario Draghi. The ECB left interest rates at zero and said it was in no hurry to end quantitative easing measures.

Draghi said the bank would probably ‘taper’ its quantitative easing measures, which likely means the current stimulus program could run beyond its March 2017 end date.

Forecast

With ECB policy left unchanged and Draghi confirming QE would not end abruptly, the tone has been set for lower currency prices over the near-term. Yesterday’s decision by the ECB drove the Euro lower, pushing the U.S. Dollar higher, and this weighed on the Aussie and Kiwi.

The news was particularly bearish for both currencies because intraday momentum in the Australian Dollar was already pointing lower due to the disappointing jobs data. Traders were also ready to take the hammer to the New Zealand Dollar because of next month’s widely expected interest rate cut.

I’m looking for the selling to continue against the AUD/USD and NZD/USD on Friday although sellers may have trouble with the Australian Dollar at .7620 to .7593. The first downside target for the New Zealand Dollar is .7149 to .7122.