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The Week Ahead in FX Markets – Calm Before the Storm

Published October 29, 2018

By Phil Lynch

I often say that predicting foreign exchange rate movements are a bit like predicting the weather – and it looks like the New Zealand dollar is about to hit a stormy patch. Like the weather, forecasting currency can be tricky. Sometimes storms fizzle out. Other times they can tear things apart. Here is my view on the upcoming storm season.

The Calm

Before any good stormy season, we typically get some good calm weather. It might be hard to believe that a NZDUSD at 0.6500 cents is ‘calm’. But there has certainly been a lot of consolidation at these levels compared to the drastic movements from earlier in the year. The month of October has seen the kiwi spend almost all its trading time between 0.6450 and 0.6600 cents. By kiwi dollar standards, this is my calm before the storm.

The Storm Clouds Brewing

The clouds are growing grey on the horizon, and kick off this week with a huge array of economic announcements. However, the real storm is expected to hit next week – but more on that later.

US Data This Week

This week brings several key announcements for the NZDUSD. Kicking off the week is US Consumption data due out overnight. Wednesday morning brings US Consumer Confidence – which may have been hit lately with stock market jitters. I get a sense that markets will struggle to support the US dollar from these numbers – given the recent nervousness accross financial markets.

NZ Business Confidence

On Wednesday we get another chance to see the ANZ Business Confidence numbers. Confidence readings have been hitting record lows, which has created a nice floor for these to bounce from – which is what I expect to see. However, confidence numbers are also generally considered a poor indicator, given it is a leading indicator, that is not an indicator of output, and is more an indicator of opinion. Additionally, confidence often moves in line with the political party currently in power.

US Non-Farm Payrolls

The week is rounded out by US Non-Farm Payrolls, with markets expecting 190k new jobs and an Unemployment Rate of 3.7%. These solid numbers will no doubt continue to support the US Fed’s aggressive tightening cycle. It would take more than one miss on these numbers to change the Fed’s course.

The November Storm Season

November will be a telling month for the fortunes of the NZDUSD. The week beginning Monday, 8 November has several key announcements for the kiwi. This includes GDT Dairy Auctions, the Unemployment Rate, and the RBNZ’s OCR and MPS announcement (Thursday, 11 Nov).

The RBNZ’s previous announcement saw a change of language that has had a real impact on the kiwi. The shift mentioned that the next move in the OCR could be ‘up or down’. Immediately markets saw this as a dovish signal. And whilst there was a change in the tone, it is very much still a neutral outlook – which has been the case for many years.

The main event in November, however, will be the US mid-term elections. To take control of the house, Democrats need to hold onto their current seats and flip another 23 held by Republicans. Should this occur, Donald Trump’s government could face enormous difficulties in getting policy changes over the line – and this could derail much of the positivity seen in US markets since Trump was elected.

Other Points to Watch This Week

Australian CPI data is out on Wednesday afternoon, and markets are expecting this to come in at 1.9%. The RBA has also been neutral on their policy outlook – but this will be a major event for the Aussie dollar and has the potential to impact the NZDAUD. Thursday sees Aussie Trade Balance data, and Friday brings Aussie Retail Sales.

European Inflation data and the Unemployment Rate is published on Wednesday evening. With inflation ticking higher, some are asking if the ECB will start to think about rate rises in 2019. Markets are expecting annualised inflation at 2.2%. This will no doubt be counterbalanced by the Unemployment Rate, which is expected to come through at 8.1%.

The UK will get to see what the Bank of England is thinking with their course of rate hikes – which is currently looking decidedly flat, thanks in large to Brexit uncertainty. British Finance Minister was vocal over the weekend, saying that he was confident Britain would come to a deal with the EU, and that a ‘no-deal’ was extremely unlikely. He went on to say that if a ‘no-deal’ outcome were to eventuate, that Britain would need to take a different strategy to secure the future of the economy.

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