AUD/USD and NZD/USD Fundamental Weekly Forecast – Risk Sentiment Sets the Tone During Holiday Shortened-Week

Risk sentiment is widely expected to continue to drive the price action in the Australian and New Zealand Dollars this week, but the catalysts are likely to be external factors since the domestic economic schedule is light.

Among the external factors that could influence the price action are worries over a resurgent coronavirus pandemic, the upcoming U.S. Senate runoffs in Georgia and President Donalds Trump failure to sign the recent stimulus package passed by Congress last Monday.

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Last week, the Australian Dollar settled at .7600, down 0.0023 or -0.30% and the New Zealand Dollar finished at .7124, down 0.0017 or -0.24%.

One of the best indicators of strong risk sentiment will be a stock market rally. In the United States, traders are hoping for a “Santa Claus Rally”. If this takes place then look for the buying to spillover to the Aussie and Kiwi.

The “Santa Claus Rally” is a phenomenon whereby stocks have tended to perform well in the last five trading days of December, and the first two of January. The event has lifted equities in 55 out of 74 years since 1945, according to CFRA Research. This year, the period started on December 24.

If stocks perform well then consider risk is on. A risk on scenario will likely be supportive for the Aussie and the Kiwi.

Last Weeks Recap

The Australian Dollar edged lower last week with most of the loss coming in Mondays session as investors dumped the higher-yielding currency on worries over a fast-spreading new coronavirus strain in the U.K. Money flowed out of the Aussie and into the safe-haven U.S. Treasurys and U.S. Dollar. Investors also shed risk in the global equity markets.

After the initial break at the start of the week, the Aussie spent the next two session clawing back most of those losses after experts said there was no evidence that vaccines would not protect against the new virus variant. Nonetheless, Britains chief scientific adviser said that in the meantime tighter restrictions on public life in Britain were likely.

The New Zealand Dollar also finished marginally lower, tracking the same pattern as the Australian Dollar and Japanese Yen, and for the same reason – fear the new coronavirus variant could slow down the global economy recovery. A short-covering rally in the U.S. Dollar also weakened the commodity-linked currency.

Following its steep sell-off on Monday, Kiwi bulls regained their composure to retrace more than 50% of its earlier losses. The move was driven by a rise in risk appetite on the expectations of a Brexit trade deal between the U.K. and the European Union. Also helping to underpin the New Zealand Dollar was the announcement of a new stimulus package agreement in the United States after several months of negotiations.

[fx-article-ad]Weekly Outlook

The week starts with Australia and New Zealand on bank holiday. After trading for three sessions, the countries will return to another bank holiday. Trading is expected to be light with volume well-below average. This does open up the possibility of heightened volatility. If trading, you goal should be to avoid getting whipsawed.

The direction of the AUD/USD and NZD/USD is expected to be guided by investor demand for risk. Risk on will be bullish, Risk off will be bearish.

For a look at all of todays economic events, check out our economic calendar.