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AUD/USD and NZD/USD Fundamental Daily Forecast – Capped by Tightening Yield Spreads, Weak Commodity Prices

The Australian and New Zealand Dollars are edging higher on Friday, helping to limit their weekly losses amid growth worries and declining commodity prices.

Fear of a global recession is weighing on commodity-linked currencies with dampened expectations for interest rate hikes domestically making the Aussie and Kiwi a less-attractive investment this week.

At 05:48 GMT, the AUD/USD is trading .6914, up 0.0021 or +0.30% and the NZD/USD is at .6305, up 0.0029 or +0.46%. On Thursday, the Invesco CurrencyShares Australian Dollar Trust ETF (FXA) settled at $68.30, down $0.31 or -0.45%.

The AUD/USD is headed toward its third straight weekly loss, while Kiwi traders are eyeing a fourth weekly loss in a row.

Key Commodities Signaling Lower World Growth Expectations

Copper, a bellwether for world growth, is down 3% in Shanghai overnight, and in a position to post a more than 7% loss for the week. Iron Ore, is also facing a weekly loss.


“The global growth outlook is deteriorating rapidly as central banks jack up rates aggressively, the Fed enacts record quantitative tightening, and China remains in partial lockdown,” analysts at Westpac said in a note.

Interest Rate Spreads are Narrowing

In another sign of weakness for the AUD/USD, the spread between Australian and U.S. Government bonds is narrowing, making the Aussie a less-attractive investment relative to the Greenback.

Australian government bond futures are rallying overnight. In the process, the yield on the benchmark 10-year Australian bond dropped 13 basis points to 3.713%. This marks a steep retreat from the 4.125% it reached last week.

The Aussie bond rally has narrowed the spread over U.S. Treasuries to 60 basis points from a top around 90 basis points last week.

Three-year yields also fell to 3.313% from a recent high of 3.767%, and bank bill futures have started paring back aggressive rate hike bets, according to Reuters.

Daily Forecast

Later today at 11:30 GMT, Reserve Bank of Australia Governor Philip Lowe is due to speak on a panel with other central bank governors about the monetary policy and inflation in Zurich. He is expected to reaffirm the central bank’s determination to tame rising inflation.

In the U.S., FOMC Member James Bullard is scheduled to speak at 11:30 GMT. He is a noted hawk so it would come as a surprise if he softened his tone about the need for aggressive interest rate hikes.

The key report and likely a market moving event will be the U.S. Revised University of Michigan Consumer Sentiment. Traders are expecting it to match the previous forecast at 50.2. A drop below 50.0 would likely trigger a volatile reaction in the financial markets. U.S. Treasury yields in particular would probably drop sharply.

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

This article was originally posted on FX Empire