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The Week Ahead in FX Markets – Flightless bird is lost, as NZD sets records for lack of volatility

Published December 2, 2019

By Phil Lynch

Last week the NZD/USD exchange rate was setting records for its lack of volatility. For the entire week, the NZD/USD traded in just a 45-point range (or just 0.7%). This is the lowest weekly trading range the kiwi has seen over the last decade. On average, over the past decade, the NZD/USD trades in a 189-point range (or 2.9%). On top of that, the difference from open to close across the week was just 5 points, when the normal change 93 points. It is fair to say the flightless bird is lost for direction.

Why is the Kiwi Stuck?

Last week was particularly unique, with the stars aligning for a week of low volatility. There were very few releases of economic data or central bank decisions. This coincided with the U.S. Thanksgiving holiday falling on Thursday.

It was also slow because central banks around the world have shifted to an ‘on hold’ theme with their base interest rates. This is driving a ‘wait and see’ approach in FX markets, with no further changes expected from central banks in 2020.

Trade Wars – No Deal yet

Slowness in currency markets was further exacerbated by the lack of meaningful progress on trade agreements between the U.S. and China. The trade war is now in its 17th month, and there is only limited scope for a deal to be struck in 2019.

The U.S. is poised to add another 15% tariff on $156 billion of Chinese goods come the 15th of December. Beijing’s top priority is for the U.S. to remove existing tariffs on Chinese goods, rather than planned tariffs, as part of any pending trade deal.

Whilst President Trump said he is in the “final throes” of a deal, experts are now not expecting a phase one trade agreement until the new year – if at all. 2020 brings with it a presidential election in the U.S., and we can expect that trade wars will play a part in Trump’s campaign – and we are yet to see which way Trump will take the war.

President Trump has also raised the stakes by signing new legislation that (in a roundabout way) supports the protesters in Hong Kong. The legislation is in two parts. Firstly, the U.S. State Department is now required to certify annually that Hong Kong retains enough autonomy to justify favourable U.S. trade terms. The second bill is banning the export to Hong Kong of crowd-control munitions such as teargas, pepper spray, rubber bullets and stun guns. China denounced the legislation as gross interference in its affairs and a violation of international law.

The Week Ahead

The week ahead, however, is likely to be slightly more interesting, as it brings some important decisions and data releases, with the most notable being:

  • The RBA Cash Rate Decision.The bank is expected to keep rates on hold at 0.75%, but markets will be looking for clues as to the outlook for 2020.
  • The RBNZ Capital Review Decisions.The bank is expected to raise the capital requirements for banks. This will raise costs for the banks, which is likely to increase wholesale interest rates (and have a contractionary effect on the NZ economy).
  • U.S. Non-farm Payrolls. Markets are expecting a standard 180k new jobs to be added, with the Unemployment Rate steady at 3.6%, and Average Earnings growing at 3.0%.

Where to Next for the NZD?

With the distinct lack of direction, and the ‘on hold’ themes that settled into markets, it is likely that the NZD will have another quiet week. Markets will always face event risk leading into a U.S. Non-farm Payrolls decision, and this will likely be the main event to watch for this week.

When looking more broadly at the current level of the NZD, it is fair to conclude that the NZD has had an unfair share of depreciation across 2018/19. The kiwi has shed 9.4% over the past two years, despite maintaining relatively strong economic fundamentals. With these relatively strong fundamentals, and the lack of direction from elsewhere, it is my opinion that the NZD is now back on the staircase in a slow grind higher. Further gains will likely be driven by trade agreement related risk-sentiment.

Curve Balls 

There are a few curve balls that could upset things this week. The most significant being the U.S. and China’s potential to come to a trade agreement, or otherwise. We’re unlikely to see any real progress this week, but this has been the most significant driver of risk-sentiment in 2019, and the kiwi’s performance is tied to this.

The RBNZ’s Capital Review Decisions on Thursday are also likely to play a role. The decisions will inevitably require banks to hold a higher percentage of capital. Australian banks make up 86% of the NZ banking market – and many of these banks have indicated higher capital requirements will lead to increased borrowing rates – which will have a tightening effect on our economy and may require the RBNZ to further consider their monetary policy settings.

The final curve ball to keep tabs on is the British General Election. This is not until 12 December (so the end of next week), but recent polls have indicated waning support for the incumbent Prime Minister Boris Johnson.