AUD/USD and NZD/USD Fundamental Weekly Forecast – Impact of Coronavirus May Force Central Banks to Cut Rates

James Hyerczyk

The Australian and New Zealand Dollars finished lower last week despite the release of better than expected domestic economic data. Weighing on the Aussie and Kiwi were a surge in the U.S. Dollar and falling demand for higher-yielding currencies as the spread of the coronavirus dented risk sentiment, prompting a flight into safe-haven assets.

Last week, the AUD/USD settled at .6826, down 0.0046 or -0.67% and the NZD/USD finished at .6608, down 0.0002 or -0.04%.

Corona Virus Update

Australia confirmed its first four cases of the virus on Saturday and expects more, its health authorities said, as the country is a popular destination for Chinese tourists. While the majority of confirmed coronavirus cases and deaths are in mainland China, the virus has also been identified in Japan, South Korea, Taiwan, Thailand, Vietnam, Singapore, Nepal, France, Australia and the U.S.

The World Health Organization (WHO) has so far declined to declare the disease a global health emergency, saying it needs more data. The virus is currently spreading through human-to-human contact and in medical settings, the organization said.

In China, President Xi Jinping on Saturday warned that the spread of the coronavirus presents a “grave situation,” as officials from central China to Hong Kong struggle to stop the spread of the disease that has so far infected more than 1,400 people worldwide and killed 42.

Australia Fundamentals Recap

Australian consumer pessimism deepened in January as households fretted about the economic impact of devastating bushfires that killed 29 people, millions of animals and destroyed thousands of homes in recent months.

The Melbourne Institute and Westpac Bank index of consumer sentiment, released on January 21, fell 1.8% in January to the lowest since last October. It declined 1.9% in December. The index was down a hefty 6.2% from a year earlier, and at 93.4% indicated pessimists continued to outnumber optimists.

Australian jobs data showed a surprising drop in unemployment to a nine-month low, but the strong number – the 28,900 jobs created in December was nearly double what analysts had expected – prompting an unwinding of bets that the central bank will cut rates next month.

New Zealand Fundamentals Recap

Consumer prices rose more than expected by the Reserve Bank (RBNZ) and most bank economists in the three months to December, according to the new Statistics New Zealand figures.

The consumer price index (CPI) rose 0.5% between the September and December quarters, and 1.9% between the December 2018 and December 2019 quarters.

At 1.9%, inflation was nearly spot-on the midpoint of the 1% to 3% range the RBNZ targets using the Official Cash Rate (OCR).

Weekly Forecast

The wildcard this week will be the spreading of the coronavirus and its potential negative impact on the economies of China, Australia and New Zealand. This is a major problem and since it is worsening, it is not expected to go away soon. This should keep the pressure on the AUD/USD and the NZD/USD.

In the U.S. this week, the Federal Reserve is expected to leave policy unchanged. However, the U.S. Dollar is expected to rise as investors move money into the so-called safe-haven asset.

The major report out of Australia will be Consumer Inflation on Wednesday. It could help determine whether the RBA cuts rates in February. Traders are looking for CPI to come in at 0.6%. Trimmed Mean CPI is expected to come in at 0.4%.

In New Zealand, the minor report to watch is Trade Balance.

Traders are going to continue to debate whether the RBA and RBNZ should cut rates in February, but last week’s economic data has cooled thoughts of automatic cuts.

Both central banks may have to cut rates if the coronavirus becomes a major threat to the economy.

This article was originally posted on FX Empire