The Kiwi Dollar finished last week with a negative tone, losing ground on Friday night as the U.S Dollar made gains against most major currencies. Better than expected U.S retail sales data along with a small rebound in US consumer sentiment provided buying support for the greenback ahead of a big week of data and interest rate decisions. The NZD opens the week back below the 0.6400 level, around half a cent below last week’s opening levels, and is lower on all major cross rates, with a particularly heavy fall vs a resurgent GBP, with the NZD/GBP cross down around 2%. A bit of uncertainty lays ahead today with all eyes on oil prices after a drone attack on Saudi Arabian oil facilities on Saturday.
US Retail Sales Surprise
Solid American retail sales data has eased some of the concerns about the US economy. Sales were up 4.2% for August compared to a year ago, although was slower than the 4.9% gain in July. While the U.S Fed is widely expected to cut interest rates this week, it now has some market analysts suggesting further cuts might not be a done deal.
THE WEEK AHEAD
Without question the big event in FX markets this week is the U.S FOMC rate decision to be announced 6:30am on Thursday morning NZ time. Other announcements and data on Thursday, including NZ GDP, Australian Employment, and the Bank of England rate decision are likely to be overshadowed by the Fed announcement. Trade War developments, Brexit news, and now the oil tensions, will also have an impact on markets this week.
Fed Expected to Cut
A cut of 25 basis points to US interest rates is widely expected to be announced by the U.S Fed on Thursday morning. After nine consecutive rate increases between 2015 and 2018, the Fed finally cut rates last month by 25 basis points. Since that cut, concerns continue around the health of the U.S economy and what impact the trade war with China and a broader global slowdown will have. While unemployment remains low, job growth has been limited, and other indicators such as manufacturing and housing have been mixed. Fears of a recession and ongoing uncertainty is only making economic conditions worse and is why markets are expecting a further cut in rates this week. However, as always it is not 100% certain, with some market participants siting the positive retail sales data released over the weekend as a sign that things may not be as bad as thought, and a cut in rates not a done deal.
Even if a rate cut of 0.25% is announced, there will be just as much interest in Fed Chairman Powell’s press conference 30 minutes later, with markets hanging on every word looking for clues on where the Fed thinking is at. Expect some volatility on Thursday.
Market sentiment has improved over the past week as tensions thawed in the U.S – China trade war. After several months of progress followed by large setbacks, there finally appears to be some co-operation taking place and things back on track to reach some sort of agreement. Reports over the weekend have suggested that Trump advisors have discussed offering a limited trade deal to China which would roll back some of the recent tariffs put in place. Meanwhile President Trump himself announced that that the planned tariffs for October 1st would be delayed for two weeks as a goodwill gesture. On the other side, China is considering whether to increase its purchases of US agricultural goods in the lead up to the October trade talks. While a final solution is still some way off, markets are reacting well to the two sides moving in the right direction.
Following on from the FOMC announcement early Thursday morning we have local GDP data for the June quarter at 10.45am. Market expectations are for a 0.40% expansion for Q2, with an annual growth rate of 2%. As always, a result below expectations will be negative for the NZD, but any moves could be limited with the bigger FOMC announcement being made just a few hours earlier.
Australian Employment Data
Across the ditch, Tuesday sees the release of minutes from the latest Reserve Bank of Australia meeting. This will be followed by employment data released on Thursday afternoon. Labour market data is a major indicator for the RBA, and the result will be closely analysed, with markets expecting 20,000 jobs to have been added in August, with the unemployment rate to remain steady at 5.2%. The chances of an interest rate cut from the RBA in October have reduced over the past few weeks, however weak labour market data could change things.
Brexit developments and the Bank of England interest rate decision stand out as the main factors to influence the Pound this week. The GBP has been on a good run over the past couple of weeks as the odds of a hard Brexit gradually fade away. Thursday night sees the interest rate decision from the Bank of England, with markets not expecting any change.
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