By Phil Lynch
The NZD/USD opens September below 0.6300 cents, which is the first time in over a decade the kiwi has kicked off a month at such levels. September is traditionally the most volatile month for the flightless bird, which over the last 20 years has seen an average trade range of 4.2 cents, or 6.7%. Over the last 10-years the average range is even higher, at 4.8 cents, or 7.7%. If we have another ‘average’ month in September, the kiwi could trade between 0.6055 and 0.6537. However, the ingredients for a worse than average month are all there.
In the month of September, the NZD/USD will grapple with:
The kiwi tends to perform poorly in times of economic uncertainty – and this is largely why the NZD/USD is trading where it is. There is no doubt that there is further volatility ahead for the kiwi, so any kiwi businesses with uncovered positions should be considering the risk of heightened volatility.
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The week ahead is busy for Australia, with a number of important economic releases, and a decision on the Cash Rate from the RBA. The RBA is expected to keep rates on hold at 1.00%, with markets pricing in a small chance (14%) of a cut. It will be interesting to note if the RBA’s course has changed since their recent attendance at the Jackson Hole Symposium 10 days ago.
Economic data released out of Australia this week includes the Current Account Balance, which is expected to show a surplus for the first time since 1975. The surplus has been pinned on rising export returns and sluggish domestic demand. Iron Ore prices have been through the roof recently, thanks to a shortfall in Brazilian supplies.
The Australian week is rounded out with GDP data. The output here is not expected to show as much strength as other developed economies, with markets picking the year on year number to come in at 1.4% for the second quarter. It’s likely any benefit from rising export prices and a lower AUD will not be felt until the Q3 numbers are released.
Markets are unsure about the course for Fed rate cuts so economic data will play a more important role in the lead up to Sep 19’s FOMC Decision. Data this week includes the ISM Manufacturing & Non-manufacturing PMI’s, and Factory Orders, which should provide an insight into the state of the US economy amidst the trade wars. There are also several speeches later in the week from US Federal Reserve members, who may provide some insight on what the Fed is thinking later this month.
The most important release for the week will be US Non-farm Payrolls data. Markets are expecting 159k new jobs to be added, with Unemployment steady at 3.7%, and Average Earnings dipping to 3.1%. This will be a key number for the FOMC to factor in when making their decision on rates.
If one was to guess what might save the NZD from sliding any further, most would guess it would come from falling US central bank rates. After all – markets are expecting the Fed to cut rates below 1.00% by the end of 2020.
However, it may be the Aussie economy that saves the NZD from falling any lower. The Aussie economy is once again showing why it is the lucky country. Iron ore & coal made up $120 billion of exports, which is 30.6% of Australia’s global exports. Iron Ore prices are still at extraordinary levels (despite the recent fall), and these are yet to be matched by the Aussie dollar. Traditionally, the Aussie dollar has followed the course of Iron Ore prices but recently has failed to keep up. Should this correlation return then the AUD/USD could bounce back in a big way – and will likely carry the NZD with it.
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