A big week ahead see’s interest rate decisions from both the RBNZ and RBA. Both decisions are considered to be 50/50 calls and it promises to be a volatile week for both the NZD and AUD. More about this shortly, but first a recap of the weekend’s trading which sees the Kiwi Dollar open lower as President Trump just a few hours ago tweeted that he would increase tariffs on Chinese goods. This has surprised markets and boosted the USD, after it had lost ground on Saturday morning after a mixed non-farm payrolls report. The Kiwi had closed the week marginally higher but has gapped lower first thing this morning after the Trump tweet.
Trump Surprises Markets – Tariffs to Increase This Week
President Trump announced on Twitter that trade negotiations with China were going “too slowly” and tariffs on $200 billion of Chinese goods will increase to 25% (from 10%) on Friday. Trump also added he would target another $325 billion worth of goods “shortly”. The announcement has caught markets by surprise as most news had been positive in recent weeks. The USD has immediately clawed back the losses incurred on Friday at the expense of risk based currencies like the NZD.
U.S Unemployment at 50 Year Low
The Greenback was lower to end the week (prior to the Trump Trade Tweet) despite a better than expected non-farm payrolls number which saw 263,000 jobs added in April vs market expectations of 185,000. U.S unemployment dropped to its lowest level since 1969, although the labour market participation rate was lower at 63%, which balanced out the strong job growth number. Usually a stellar number like this would send the currency higher, but surprisingly the Dollar was fairly subdued.
The Week Ahead
RBNZ – To Cut or Not To Cut
Without question the big event this week for local markets is the RBNZ decision on Wednesday, although the RBA decision the day before will also have a big bearing on the NZD. Market opinion is evenly split as to whether the RBNZ will cut rates with some local banks calling a cut on Wednesday, while others are predicting a cut in August. There are also some well respected commentators believing the RBNZ will not need to cut given the recent turnaround signs in the health of the global economy. The RBNZ have previously raised concerns around global headwinds, but things appear to be stabilizing. Recent data out of the U.S, Europe, China, and the UK have all displayed signs of improving economies.
It looks like the only thing that can be agreed on is that the Kiwi Dollar is likely to be volatile this week. It looks like a simple equation;
– If the RBNZ cut, the NZD will fall
– If the RBNZ hold, the NZD will rise
RBA – Also a Close Call
The Reserve Bank of Australia gets in before the RBNZ, announcing their rate decision on Tuesday at 4.30pm. Like the RBNZ, it is considered too close to call with market opinion very much split on whether we will see a cut in rates. The RBA has recently opened the door for a rate cut after recent soft Australian data which has seen the AUD come under pressure and test the key 70 cent level. However, it is a poor inflation report that might force the hand of the RBA. Headline CPI is at 1.3%, a full percent below the RBA target mid-point of 2.5%, with many believing that the RBA will have no choice but to cut rates. A Bloomberg survey of economists shows 14 of 26 respondents predicting a cut.
U.S – China Trade Negotiations Back in Focus
This week did look to be all about the RBNZ and RBA, but the tweet from President Trump earlier this morning has suddenly placed a lot of selling pressure on risk based currencies such as the NZD. US-China trade negotiations will be now be the focus for the first part of the week as markets await China’s response. A defiant or aggressive response could freeze current negotiations which would place further selling pressure on the NZD.
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