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The Week Ahead in FX Markets – Flightless bird stays underground | RBA Decision and US Non-farm Payrolls Ahead

Published September 30, 2019

By Phil Lynch

The flightless bird is staying underground as we kick off the week, with the NZD/USD opening Monday below 0.6300 for the third time this month. Markets continue to grapple with an array of issues from lower interest rates and trade wars to Brexit concerns. That said, it appears the free-falling NZD has stopped, but the risk factors remain.

In times like this, there are heightened concerns of a black-swan style event, or an event in which the markets have a major and unexpected reaction (such as during the GFC). The warning signs have been emerging, and some businesses have been taking steps to protect against this accordingly. Perhaps summed up best by Alan Greenspan when he said:

Contagion is the critical phenomenon which causes the thing to fall apart.

The Week Ahead will be busy, with a couple of low-key NZ data points, several important data points from China and the US, along with the important Reserve Bank of Australia announcement.

Economic Releases

The first piece of data released this week will be the ANZ’s Business Confidence survey for September. The outlook remains bleak, with the index sitting at -52.3% from August. Later in the week GDT Dairy Prices are released.

However, it will be the US releases that attract the most attention, culminating in US Non-farm Payrolls data out early on Saturday morning. Markets are expecting some signs of weakness to creep into the numbers given the ongoing trade spat between the US & China. The headline number of new jobs is expected to deliver a weaker 145k, but with a strong Unemployment Rate at 3.7%, and Average Earnings growing by 3.2%.

This week also includes key manufacturing data, with the ISM Manufacturing PMI and Factory Orders due out early Wednesday & Friday mornings. Both indexes are expected to show weakness, with the ISM number a razor thin 50.1 (above 50 meaning expansion), but with Factory Orders expected to show a -0.3% decline.

The RBA – Catching Up

Tomorrow afternoon the Reserve Bank of Australia is expected to cut their Cash Rate to 0.75%. Markets have priced in a 74% chance of a cut, which would bring the banks total cuts to 0.75% (down from 1.50%) since they began cutting rates earlier this year.

The rate cut is expected to go through, given the higher than desired level of Unemployment in Australia, which sits at 5.3%. The RBA will also be playing catch up to other central banks who have already cut rates aggressively. The cut is also deemed necessary given Australia’s reliance on Chinese demand. Whilst there is an outside chance the RBA keeps rates on hold, we expect further AUD weakness if, and when, the rate cut is confirmed.

Trade Wars

The U.S. and China are set to resume trade talks in October, yet over the weekend President Trump was continuing to raise the stakes. Reports have emerged that Trump will attempt to delist Chinese firms from U.S. equity markets, whilst also looking at ways to limit U.S. investor stakes in companies listed in China.

The impact of trade wars is feeding into the global economic slowdown. One crucial area being affected, is Consumer Sentiment in the U.S., as measured by the Uni of Michigan. This number is down to 93.2 – considerably below recent levels (the three-year average is 96.7). Consumerism makes up about 70% of the U.S.’s GDP, which means this number will stand out to President Trump in a big way. With an election coming up in 2020, it is difficult to know if this will be motivation enough for Trump to take a more accommodating approach with China.

The NZD has certainly been a victim of the trade war, as it tends to be a risk-sensitive currency. Since President Trump took power in January 2017, the NZD has fallen 11.6% on a trade-weighted basis. Should Trump’s motivations shift and we see positivity around a trade agreement, we can expect the NZD to recover some of that lost ground.

Brexit Month About to Begin

The NZD needs more risk events like a hole in the head, but as we head into October we should brace for turbulence. The EU is reportedly in despair with the hopes of a last-minute deal fading. Meanwhile, it remains illegal for PM Johnson to take the UK out of the EU without a deal. There is so much uncertainty as to how this will play out – and this poses risks for the risk-sensitive NZD in October – the month at which the Brexit deadline comes due.