Australian Dollar Outlook:
- The Reserve Bank of New Zealand is expected to cut its main interest rate this week
- AUD/USD shares a statistically significant positive correlation with NZD/USD and could see its price fluctuate in the event of a surprise from the RBNZ
- Elsewhere, AUD/NZD could look to pierce nearby resistance
Australian Dollar Outlook: AUD/USD, AUD/NZD Levels Ahead of RBNZ
The Australian Dollar may find itself caught in the crossfire of forex volatility when the Reserve Bank of New Zealand delivers its interest rate decision on Wednesday at 00:00 GMT. With the market widely expecting a 25-basis point cut and subsequent pause on rate reductions, any deviation could spark volatility in the New Zealand Dollar and its cousin – the Australian Dollar – given that the currency pairs have historically shared a strong correlation.
With that in mind, it is important to take stock of the AUD/USD levels at hand in the event of a monetary policy surprise in the South Pacific. Should the RBNZ stray from market expectations and argue that further cuts are warranted, the New Zealand Dollar and AUD/USD would likely fall under pressure as the growth and interest rate expectations for the region are adjusted lower. Consequently, AUD/USD could threaten the pair’s 2016 low around 0.6827 before taking aim at recent support slightly beneath 0.67.
AUD/USD Price Chart: Daily Time Frame (October 2018 – November 2019) (Chart 1)
On the other hand, 0.6895 to 0.6920 marks an area of considerable confluence to the topside, threatening to keep a lid on Aussie price gains. A break above the zone could open the door for a continuation higher in the days to come, a key aspect of my AUD/USD analyst pick which is awaiting bullish confirmation. While AUD/USD and NZD/USD look to wrestle with the relative strength of the US Dollar, AUD/NZD is a pair which is likely to receive a more direct injection of volatility. Further, the potential for outsized moves is greater given the pair’s lower liquidity.
With that being said, Monday’s RBNZ rate decision has the opportunity to fundamentally alter the pair’s landscape. With AUD/NZD enjoying a 2.65% climb in the year-to-date, any indication that the RBNZ will lower rates further could fuel another leg higher, while a pause in easing – as expected - may leave the pair longing for direction alongside plummeting rate cut odds from the RBA.
AUD/NZD Price Chart: Daily Time Frame (August 2018 – November 2019) (Chart 2)
To that end, AUD/NZD price gains in 2019 assert the pair is leaning higher at this time, but considerations remain. Notably, the pair has struggled to surmount the 1.084 level recently and could threaten to offer resistance prior to the Fibonacci level around 1.089. As the market awaits the Reserve Bank of New Zealand’s decision, follow @PeterHanksFX on Twitter for further updates and analysis and check back at DailyFX for commentary on the decision’s impact.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
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