The New Zealand dollar was absolutely hammered last week, falling a staggering 2.2% against the greenback. The move was surprising given that the US Federal Reserve had just one week earlier confirmed its new course for interest rates was to be a steady one – with no further rate hikes planned for 2019. The sharp decline was largely down to two key factors: a weaker Australian Dollar, and softer NZ employment data.
The kiwi was initially dragged lower by our nearest neighbour in the Aussie dollar, which faced a similarly tough week. The Aussie was sent lower after the RBA Governor’s comments which warned markets that the next move from the central bank could be up or down and would be dependent on the strength of the labour market and inflation. This was perceived as a more dovish stance than previously.
It got worse for the kiwi – which was hit hard by NZ employment market data that showed our Unemployment Rate jumping to 4.3%, which was higher than the market was expecting.
2.2% Lower – Was it Justified?
The kiwi fell 2.2% across the week – but the key question for me is if the 2.2% is justified? And the answer, in my opinion, is no.
Firstly, the RBA Governor has adopted an ‘Orr-esque’ type approach, where he has stated the next move could be up or down and is data dependent. This doesn’t really give us a lot of new information, and whilst some dovishness can be interpreted from this, it is more likely acknowledging a neutral course of action amidst global uncertainty. It also ignores other factors, including rising Iron Ore prices.
Secondly, our own unemployment rate at 4.3% is still at very good levels (and at RBNZ forecasts). Anecdotally, it is very hard to find good people, and that wage pressures are starting to creep in. So, is this really that bad a number? Then there is the fact that this is a quarterly survey that has acknowledged deficiencies – a minor miss in the number does not warrant such a steep fall in the kiwi. And of course, there is the fact that RBNZ Governor Orr always ‘looks through’ short-term results. Orr, by nature, is a very long-term thinker – and I’m confident we’ll hear more to this point at Wednesday’s OCR Decision and MPS release.
The Week Ahead – RBNZ OCR & MPS
The first key element to note is the change in timing for 2019’s OCR and MPS releases. These will now be released on Wednesday’s at 2:00 PM NZ Time (rather than the previous Thursday at 9:00 AM NZ Time). If you plan FX hedging around these announcements, it is well worth noting this change.
The second key element of this week’s announcement will be the ‘no change’ decision in the OCR, which will be left on hold at 1.75% (this is priced at a 93% chance in interest rate markets). The 7% chance is for a rate cut – to 1.50%. This implies markets are heading into this announcement with a dovish stance. It is worth noting, that markets get more dovish further into 2019 – pricing in an average of 19 basis points of rate cuts by September. This makes the first OCR & MPS release of 2019 an important one, where Orr will set the tone – is the 19 basis points of cuts accurate? Or have markets over-estimated the dovishness of the RBNZ? In my opinion, markets have over-estimated the dovishness and Governor Orr will simply continue his rhetoric of “the next move could be up or down”, which I believe to be another way of saying no changes for a very, very long time.
In summary, I think the fall in the kiwi on the back of the recent AUD fall and employment data has been overdone. It would likely take some reinforcement on the dovish side to justify the recent fall, and I don’t believe we will get it. With a neutral stance – the NZD may bounce back, and we once again need to divert our attention to offshore factors.
The Week Ahead – The Greenback
US dollar strength has yo-yoed dramatically in 2019. Up until last week, the higher NZD/USD was largely thanks to the US Federal Reserve cautioning about global markets and changing their interest outlook. This factor alone, is a US dollar negative – which could allow the NZD/USD to climb slowly throughout 2019. However – this factor is not alone – and there are several other items to watch out for.
The first of these is a little thing dubbed a ‘trade war’, which is currently on a truce. The truce, however, is set to expire soon and President Trump and Premier Xi Jinping ‘do not have time to meet’ before the March tariff deadline ends. Whilst some are optimistic that a resolution will be found, others are more cautious. The trade talks are resuming in Beijing this week, but we have little in the way of concrete evidence in what the outcomes of the trade talks will be. Trade uncertainty is having a knock-on effect on global market confidence – so any outcomes from this week’s talks will be a major for FX markets.
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