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Huge Overnight Gains for the New Zealand Dollar; Bank of England Issues Warning

Published November 29, 2018

By Phil Lynch

The New Zealand dollar has made huge overnight gains, up 1.4% against the greenback and 1.2% against the Japanese yen. It was a huge night for all risk sensitive assets, with the Dow Jones leading the charge up 500+ points or 2.2%. The move came as US Federal Reserve Chair Jerome Powell told markets that US interest rates at 2-2.25% is “just below” a neutral level, which in September was 2.5-3.5%.

This was a monumental moment for markets, which had speculated that 3-5 further rates hikes from the Federal Reserve to the end of 2019 was likely. Now, Chair Powell has effectively signalled that US interest rates are nearing neutral and that further moves would be data dependent.

Fast forward 12-months, and we could find ourselves in a situation where the US Federal Reserve has reached their neutral level and paused their tightening cycle. We could also find that by the end of 2019 the RBNZ are under mounting pressure to start raising rates from their record lows. This would turn the tables for the kiwi, which has been highly sensitive to interest rate movements.

Bank of England Issue Stark Warning

BoE Governor Carney has warned that Brexit could result in bigger hit to the economy than the Global Financial Crisis. The Central Bank has described a disorderly scenario where the UK could see an 8% annual decline in GDP, and face unemployment as high as 7.5% amidst mass emigration out of the country. The “disorderly” scenario envisages a 25 percent tumble in the value of sterling. Whilst this was not the likely scenario, it paints a worrying picture of what could happen should the Brexit negotiations fail.

ANZ Business Confidence Report Today

At 1:00 PM today, ANZ Bank are releasing their November Business Confidence report. Recent reports have been in direct contrast to economic data – with the latest reading coming in at -37.1%. The report has had a meaningful impact on the New Zealand dollar, but low confidence appears to be tied to the government of the day and markets are slowly becoming less sensitive to this data.

US Data to Round Out Week

Tonight, we have more US data that will likely make a mark on the kiwi. This includes Personal Consumption Expenditure (PCE) which is a key measure for the US Federal Reserve on Inflation. This is exactly the type of data that Jerome Powell mentioned would be crucial to their monetary policy decisions.

Tomorrow morning at 8:00 AM, the US Federal Reserve will publish their Meeting Minutes from their 8 November meeting. This may provide further insight into the Fed’s thinking on the course for US interest rate hikes into 2019.