The Australian and New Zealand Dollars are giving back yesterday’s small gains on Friday. Volume is extremely light due to the lack of fresh economic news and an extended Thanksgiving holiday in the U.S. Many of the major market participants are expected to remain on the sidelines until next week so don’t expect much movement today.
At 1200 GMT, the AUD/USD is trading .7616, down 0.0006 or -0.08% and the NZD/USD is at .6877, down 0.0011 or -0.16%.
When somewhat normal trading conditions return next week, investors are likely to continue to react to the Fed minutes and progress regarding U.S. tax reform.
Short-covering in the Aussie and Kiwi could continue early next week in reaction to the dovish minutes from the Fed meeting in November. At the meeting, some Federal Open Market Committee policymakers expressed concerns over low U.S. inflation. They felt that the upcoming data would be critical in determining whether they felt the Fed was close to meeting its 2 percent inflation goal.
The December Fed rate hike is a done deal, but the rate hikes in 2018 are the issue. Recently Fed member forecasts called for as many as three rate hikes next year. However, the dovish remarks in the latest minutes have caused Federal Fund futures traders to lower the number to only two rate hikes.
The Australian Dollar is particularly vulnerable to a short-covering rally. The Australian – U.S. two-year bond spread has drifted higher in the past few days to 5 basis points, after briefly dipping below zero on Tuesday for the first time in 17 years.
One can build a case for a bullish AUD/USD if you combine the Fed comments with the improvement in the global economic outlook, and RBA Governor Lowe’s recent positive comments on the Australian economy.
The AUD/USD still has some work to do on the upside, but crossing .7654 will indicate momentum is getting stronger. A sustained move under .7630 will indicate the Forex pair is still being controlled by the short-sellers.
The key area to watch for the NZD/USD is .6904 to .6880. Crossing to the strong side of .6904 will indicate the buying is getting stronger. However, the trend won’t change to up unless .6980 is taken out. A sustained move under .6880 will indicate the Forex pair is still in the strong hands of the short-sellers.
This article was originally posted on FX Empire