By Phil Lynch
Welcome to this week’s commentary on the New Zealand dollar, where we will cover off the key elements determining the current levels of the New Zealand dollar. This week is stacked with tier one economic and central bank releases – and the kiwi looks set to enter a more volatile period than normal. This volatility might be exacerbated by the longest Japanese market closure since the end of World War II for ‘Golden Week’. This is likely to create hazardous market conditions due to the low liquidity expected across all markets during Asian hours.
This morning the NZD opens higher than Friday’s levels, up against all our major trading partners. The news from the weekend is that US GDP growth is significantly stronger than markets expected. The Annualised Q1 GDP number came in at 3.2% vs a forecast of 2.0%. Trump was quick to weigh in, hailing the result and stating it would have been even higher if the Fed kept interest rates low – which is just in time for this weeks Federal Reserve Rate Decision.
The main event this week is likely to be the Fed’s decision on rates, and perhaps more importantly the associated stance they adopt. Markets are not expecting a change in rates, but they are pricing in two 25 basis point cuts to the central banks’ rate by January 2020. With pressure being piled on by the President, this weeks FOMC decision on Thursday will be one to watch.
Not to be outdone, the ahead also includes the flagship US economic indicator of US Non-farm Payrolls. Markets are expecting 185k new jobs to be added, with the Unemployment Rate stable at 3.8%, and the Average Hourly Earnings rising to 3.3%.
On top of the above two major events for the USD, the week ahead includes Consumption data, Consumer Confidence data, ISM Reports and Factory Orders. All of these items will contribute to the markets perceived value in the US dollar – and therefore the NZDUSD exchange rate.
We know the kiwi has been subdued of late (thanks to a dovish RBNZ and low inflation). However, the US dollar has also been rising. The chart below (click to enlarge) shows the US dollar index – which measures the USD against a basket of currencies. The US dollar has strengthened significantly over the past year, and this has to do with the strong economic numbers it continues to produce. These numbers will likely continue to drive the US dollar higher, and therefore the NZDUSD lower as we continue into 2019.
The key piece of data this week will be the Unemployment Rate published on Wednesday. Markets are expecting Unemployment to drop to 4.2% from the 4.3% published last week. Anecdotally, we continue to hear from our customers how tight the labour market is and how hard it is to find good people. So it’s hard to imagine we get anything higher than 4.3% – and at those levels the RBNZ are reasonably happy to sit tight with the OCR.
Another piece of data is Tuesday’s ANZ Business Confidence Survey. The second-tier piece of data has had a strong impact on the NZ dollar lately, despite the nature of the results being closely tied to the political party of the day. However, perhaps Jacinda Adern’s call on CGT tax will spur on some confidence in the business community.
For the kiwi, these two pieces of data are (IMHO) likely to be NZD positive – and reduce the chance of a rate cut from the RBNZ when they next meet in nine days’ time. Markets are currently pricing in a 51% chance of a rate cut – so there will be some volatility in the NZD in the lead up to this rate decision, and afterwards.
This week is special in FX markets as it is Golden Week – the week of four Japanese national holidays. Despite us kiwi’s punching above our weight in most things we do, we unfortunately lack the depth and liquidity in the world of FX that the Japanese markets bring.
This week the stars will align for the longest Golden Week of bank holidays since World War 2. We can therefore expect heightened volatility in markets as lower liquidity in our Asian sessions plays its part. We should also be alert to potential ‘flash crashes’. The January 3 flash crash saw JPY crosses move as much as 10% in a day. Here are some tips on managing Golden Week:
This Wednesday marks the beginning of the month of May. Traditionally, May has been a volatile month for the New Zealand dollar. In fact – over the past decade, May has seen the NZD trade in a range of 7.2% vs the April’s range of just 4.6%. This May, the ingredients are all there for a huge month of volatility. This includes Wednesday’s NZ Unemployment Rate, Thursday’s Fed Rate Decision, Friday’s US Non-farm Payrolls, the 7 May RBA Rate Decision (50/50 for a cut), the 8 May RBNZ OCR Decision (50/50 for a cut), and a likely trade agreement between the US & China. Watch this space!
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