Last week promised a lot of volatility, with rate decisions from the RBNZ and RBA, along with renewed risk-off market sentiment as trade tensions between the U.S and China re-surfaced. But despite a rate cut from the RBNZ and President Trump raising tariffs on Chinese goods, the Kiwi Dollar starts the new week at very similar levels to last Monday.
Two factors appear to be contributing to this;
– Markets taking a wait and see approach to the U.S-China trade talks
– Markets having largely priced in the rate cut from the RBNZ
Trump Follows Through With Tariff Threat
After plenty of speculation, President Trump went ahead and increased tariffs on $200b worth of Chinese goods from 10% to 25%. The announcement was made late on Friday afternoon (NZ time), but had little impact on currency markets. The big question now is how China will retaliate.
U.S Inflation Misses Expectations
With the market focused on the outcomes of the ongoing trade negotiations, a slightly worse than expected US CPI number also had little effect on the USD on Saturday morning.
THE WEEK AHEAD
The Week ahead looks to be all about U.S-China Trade Wars. The schedule is relatively light in terms of local NZ data this week, so direction for the Kiwi be dictated by overseas events, with particular attention on the U.S – China trade situation, and Australian employment data on Wednesday.
Trade Talks To Continue in Beijing
Markets have been surprisingly stable over the past week despite the dramatic increase in risk surrounding the ongoing trade talks between the U.S and China. The market seems relieved that negotiations are continuing and a worse case scenario of the two sides not talking has been avoided. President Trump has tweeted that he is in “absolutely no rush” to finalize a trade deal, and he did “love collecting big tariffs”. The big concerns for markets is how China will react, they have said they will retaliate but haven’t specified how. China has already applied tariffs to nearly all U.S imports, so might have to look at other measures such as allowing their currency to depreciate. So, a big week ahead with talks to recommence in Beijing later this week. Markets will be looking for signs of positive progress which may ease the “risk off” tone currently weighing on currencies such as the NZD and AUD.
US Retail Sales
While the trade talks are expected to be the main driver of markets this week, there is some major data coming out of the U.S. Retail Sales numbers for April are due out early Thursday morning. While the numbers are expected to decline from the previous month, the USD is expected to hold up, still finding support from less dovish than expected Fed speeches last week. Later in the week, we have U.S initial jobless claims, and the closely watched the University of Michigan sentiment report.
Will Employment Numbers Back Up the RBA Decision to Hold Rates?
The Reserve Bank of Australia resisted the temptation to cut interest rates last week, however many view that a cut is inevitable. This week’s employment data, to be released on Wednesday, will be a crucial number and will give markets further clues as to the likelihood and timing of a rate cut. Given the very high relevance of employment data, the results on Wednesday are likely to have an impact one way or another on the AUD, and by default the NZD as well. In the meantime, the Australian Dollar is just hanging on to the 70 cent USD level, and like the NZD, direction for the next few days will be heavily influenced by news from the trade talks in Beijing.
EUR Awaits GDP Data
The Euro has been struggling to gain positive momentum despite some improved economic data from member nations in recent times. Wednesday night sees Euro-Zone GDP data for Q1, with the big question being how will the number impact the ECB’s monetary policy. It seems unlikely that a rate hike will occur this year, but positive data this week may create a bit more optimism and lend support to the EUR.
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