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The Week Ahead in FX Markets – 2019 Second Half Preview | Trump/Xi restart trade talks

Published July 1, 2019

By Phil Lynch

The New Zealand dollar opens the second half of 2019 at 0.6723 – the highest level seen by the NZD/USD in almost 2.5 months. The kiwi is on a comeback – having jumped a whopping 3.7% across the last 10 trading days – registering an uptick on each consecutive day. The kiwi hasn’t had 10 consecutive days of price rises since 2015. It is fair to say the kiwi is looking good vs very recent levels – and this may represent opportunity for importers.

The current level of the kiwi, however, almost perfectly reflects the simple moving average rate across the first half of 2019, which came in at 0.6728. So on a longer term basis – the kiwi is reverting to more ‘normal’ levels. As we enter the second half of 2019, what should we expect?

2019 Second Half – Key Themes

Central Bank Interest Rates

Central bank interest rates are a fundamental driver of exchange rates. These interest rates have an impact on the demand for currency – which is why we always watch what central banks are up to. Right around the world, central banks are looking at lowering their interest rates – and this will be a key theme for the rest of 2019.

Our own RBNZ has embarked on a cycle of monetary policy easing, by dropping the OCR to 1.50% when they met on 8 May. Last Wednesday the went on to confirm there is a strong likelihood of further rate cuts this year. In one of their strongest indicators yet, the RBNZ confirmed what markets already expected when they said, “a lower OCR may be needed”. Markets are now pricing in a 65% chance of a rate cut at their next meeting in August, and another by the middle of 2020.

One can be forgiven for asking – why isn’t the kiwi falling for ten consecutive days when our central bank is so clearly signalling lower interest rates? The answer is simple – we are not the only central bank that is sending markets a strong signal of lower rates, and the US Federal Reserve have signalled they may cut their rates by as much as 1.00% over the next 12 months. The Federal Reserve’s next meeting is on 31 July – and we can expect to see them cut by 0.25% at the minimum.

Trade Wars

Another key theme for the second half of 2019 will be the US-China Trade War. Over the weekend, President Trump and Premier Xi agreed to restart trade talks. It all sounds a bit familiar – with the current status of trade talks likely to be one of contention so long as President Trump is in power. CNBC have put together a useful timeline of trade talks here.

Following the G20 over the weekend, the feeling is one of optimism that a trade agreement will be reached. This has been beneficial for the New Zealand dollar and is a key reason why we now see the NZD/USD back above 0.67 cents. This story, however, will likely have many twists and turns to come.

Global Economic Growth

Right around the world, there has been concern that economic growth rates are slowing to an uncomfortable pace. Global economic growth for 2019 was projected at 3.1% in January 2018, according to Consensus Forecasts. By May 2019, this had fallen modestly, to 2.8%. The May 2019 consensus forecasts global economic growth at 2.7% in 2020. Risks remain to the downside – and this outlook weighs heavily on the NZD/USD. Downside risks include:

  • Debt – with debt to GDP ratios around the world still at uncomfortable levels
  • Interest Rates – with central banks around the world already at record low interest rates, there is very little room to support an economy with lower interest rates in the event of a deeper downturn
  • Politics – in particular the populism that has driven shifts in the UK (Brexit) and the US (Trump). This populism has also fuelled protectionism which in turn creates uncertainty

2019 Outlook: NZD/USD

These factors combine to create two key themes for the kiwi dollar for the second half of 2019. Firstly, the shift in central bank interest rates point toward a well-supported kiwi, given the Federal Reserve is likely to be more aggressive with rate cuts than the RBNZ. Secondly, however, there are growing global economic conditions that are likely to weigh heavily on the kiwi – and for this reason I remain bearish in my outlook. In summary, I expect the NZD/USD should return towards 0.65 cents over the coming months and could finish lower than that level by the end of 2019.

This Week Ahead | This Month Ahead

Key factors to watch this week include the RBA Cash Rate Decision on Tuesday afternoon – which can be used as a proxy for forming views on what the RBNZ may do. Markets have priced in a 66% chance of a rate cut. The week is rounded out with US Non-farm Payrolls data on Friday. Markets are expecting 160k new jobs to be added.

Later this month the key piece of local data will be CPI data published on 16 July. This will help markets form views on what the RBNZ will be doing with their interest rates over the coming months.