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The Week Ahead in FX Markets – Central Bank Sentiment Drives NZD | ECB Announcement on Thursday

Published July 22, 2019

By Phil Lynch

This morning the New Zealand dollar opens in the mid 0.67’s, having broken out of well-trodden 0.65 – 0.67 cent range. The NZD/USD has now shifted 4.3% higher over the past 30 days – a dramatic run that has been hard to stop. On a trade weighted basis, the kiwi is up 3.3% over the same period.

Central Bank Decisions are the Key Driver

Most of the move higher has been on the back of US dollar weakness (rather than NZD strength). The US dollar has been under immense pressure with the US Federal Reserve making clear signals that rate cuts are on the way. Both the US Federal Reserve and the RBNZ are expected to cut rates over the coming 18 months. But by the end of 2020, markets have priced in a further 1.04% of rate cuts for the Fed, and only 0.65% of rate cuts from the RBNZ. On this basis – the recent clawback in the NZD is justified – as our New Zealand dollar is expected to offer a relatively higher yield.

Last week there was talk of a potential 50bp cut to the Fed’s rates when they next meet on the 31 July. However, this idea had cold water poured on it when it was clarified this did not pertain to this month’s FOMC meeting. So we can expect just a 25bp cut when the FOMC meets next week. There are no further speeches from Fed members ahead of the next rate decision.

Trump Running Interference

President Trump has never been shy of an opinion and has weighed in once again on the Federal Reserves planned rate cuts. Trump is a vocal supporter of rate cuts, and recently his criticism focused on the Fed’s flip-flopping between a 25bp and 50bp rate cut. Trump is very clearly a supporter of the 50bp cut and believes the Fed must also “stop with the crazy quantitative tightening”.

Trump has been busy with currency commentary, and has also weighed in with his criticism of moves made by China and Europe to weaken their currencies. This has led to the discussion of the possibility of broader intervention from the Trump Administration, where they sell US dollars and buy foreign currencies to weaken the US dollar. Most believe the risks of intervention are low.  But you simply never know when it comes to Trump.

Week Ahead – ECB Rate Decision is Key Announcement

This week ahead is generally light on economic data and central bank announcements. The most important event will be the ECB’s rate decision. The ECB’s refinancing rate is already at 0.00%, with the deposit rate set at -0.40%. It will be hard for them to cut rates any further – but markets are pricing in a 55% chance of rate cut to -0.50% on the deposit rate. Either way – we are likely to get a clear sense from the ECB on what their plan is to tackle the recent global economic downturn.

Geo-Political Themes this Week

New British Prime Minister – Will it be Boris?

This Wednesday (NZ time) Britain will get a new Prime Minister, and markets (and betting agencies) are favouring Boris Johnson for the job. The EU has said it is willing to give Mr Johnson a ‘no-deal Brexit’ extension. We will likely find out in coming weeks just how difficult it will be for Mr Johnson to arrange a Brexit deal in the divided British parliament.

Iran Capture British Tanker

The Iranian Revolutionary Guard has captured a British tanker for “not following international maritime regulations”. This has added to tensions in the region and British Foreign Secretary Jeremy Hunt said the Strait of Hormuz seizures are “unacceptable”. The move was enough to make waves in financial markets with the US dollar strengthening in a ‘flight to safety’ response. The tanker was sailing under a British flag but did not have any British citizens on board.

Mueller Testimony

This week brings the testimony of Mueller, the man who found no collusion between the Donald Trump campaign and Russia. Mueller is expected to give testimony about the nearly two-year probe and will be questioned by both Democrats and Republicans.