By Phil Lynch
The New Zealand dollar struggled to keep up with a cluster of developments on international markets over the past 24-hours. The general mood was negative for the kiwi, and it lost ground against the greenback, euro and Sterling as a risk-off mood entered the market.
Markets have become increasingly wary of a possible downturn in the US economy. Even with US markets closed to mark former President George H.W. Bush’s death, the sentiment has been widely felt. These concerns have been reflected by US equities (down 3.1%), and a flattening US yield curve.
This phenomenon is where longer-dated treasury yields (10-year) fall faster than the shorter-dated treasury yields (2-year). An inversion of two-year and 10-year yields, when 10-year bonds yield less than their two-year debt, has preceded every U.S. recession in the past 50 years. It’s too early to say if the US economy is about to head into a major downturn, but this has been enough to shake markets and impact risk sensitive currencies like the NZD. The old saying, “when the US economy sneezes, the rest of the world catches a cold” may be relevant here.
President Trump has somewhat typically added to the uncertainty surrounding future trade deals with China. Here is what we know:
Overall, markets are reasonably pessimistic about the chances of a positive outcome.
Australian GDP numbers came through significantly lower than expected yesterday, with quarterly growth at just 0.3% vs expectations of 0.6%, and yearly growth at 2.8% vs expectations of 3.3%. The largest decline came from Australian consumers, who were keeping their wallets shut. Private Consumption added just 0.2% to the growth numbers, down from 0.7% in the previous quarter.
This miss in growth expectations has resulted in economists reducing their expectations on the RBA. Analysts are now torn on which way the RBA should next move rates. AMP has announced they expect the next move for the RBA should be a rate cut, whilst the more hawkish HSBC have pushed out the date for an expected rate hike until the end of 2019. The NZDAUD has reached dizzying heights in the 0.94’s. Later today we have Aussie Retail Sales data which could add to the volatility.
The Bank of Canada left rates on hold at 1.75% overnight. The accompanying comments left markets feeling less hawkish on Canadian rates, and the NZDCAD climbed 0.4%.
Fonterra has further lowered its 2018-2019 guidance for its Farmgate Milk price as global demand outweighs supply. The world’s largest dairy exporter said it would pay its dairy farmers NZ$6.00 to NZ$6.30, down from the prior NZ$6.25 to NZ$6.50 per kgMS (kg of milk solids) range set in October. The kiwi has barely reacted to this news, which was widely expected.
Today I include a chart showing the ‘Flattening US Yield Curve’ mentioned earlier, highlighting how previous instances where a flat curve has preceeded recessions.
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