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The Week Ahead in FX Markets – Inflation | Chinese GDP | Aussie Unemployment

Published July 15, 2019

By Phil Lynch

It’s hard to start this morning without first congratulating the Black Caps on a tremendous performance at this years Cricket World Cup. I am sure there will be a few tired and disappointed people reading this – I certainly am one of them. But FX markets don’t sleep, and so we push ahead with our weekly preview.

The New Zealand dollar opens the week towards the top end of recent trading ranges, having gained against the US Dollar following dovish comments from one of the Fed’s board members, who mentioned ‘two’ cuts may be needed to boost inflation.

This will be an important week for our currency, with inflation data being published for New Zealand, the UK, the EU, Canada, and Japan. This week also brings the publication of July’s RBA Meeting Minutes, along with the all-important Unemployment Rate, and Chinese growth numbers. First up, we take a look at this week’s CPI data for New Zealand, and what it might mean for the New Zealand dollar.

New Zealand’s Inflation Rate and the RBNZ

Tomorrow morning at 10:45 AM Statistics New Zealand will publish our Inflation Rate. Markets are expecting the number to come in at 0.6% for the June quarter, with a 1.7% year on year result (up from 1.5% in the March quarter). The RBNZ, at their most recent Monetary Policy Statement (8 May), also forecast inflation to rise to 1.7% (which sits comfortably within their 1-3% target band). Further to this, the RBNZ has noted that the employment is “broadly at the targeted maximum sustainable level.”

So, one would be forgiven for asking why the RBNZ is so keen on cutting rates, when inflation and employment both sit comfortably within the RBNZ’s targets. Financial markets are pricing in a 73% chance of rate cut when the RBNZ next meet in August. Many, including economist Bernard Hickey, are expecting two rate cuts by November, which would take our OCR to 1.00%. Hickey has even suggested the RBNZ may need to cut rates to 0.00% next year. The ANZ Bank have also published a research paper on alternative steps the RBNZ may need to look at including quantitative easing. So why exactly are the RBNZ so dovish? The RBNZ in their last MPS have said:

…given the recent weaker domestic spending, and projected ongoing growth and employment headwinds, there was a need for further monetary stimulus to meet its objectives.

It went on to say:

A key downside risk relating to the growth projections was a larger than anticipated slowdown in global economic growth, particularly in China and Australia, New Zealand’s largest trading partners

To sum up what this means: Tuesday’s Inflation number will be important, and a ‘miss’ to either side of the expected 1.7% consensus could shift the NZD substantially. But it is the risk of a global economic downturn that is forcing the RBNZ’s hand, and this will require a focus on Australian and Chinese data.

Australia & China – Our Big Two

This week brings two key releases for Australia. The first of these is the RBA’s Meeting Minutes from their July Cash Rate Decision, where they lowered rates to 1.00%. At the time, the RBA cited:

This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

Markets will be looking at these minutes for clues as to if the RBA are planning further cuts in 2019. Further cuts will be data dependent, which is why Thursday’s Unemployment Rate is so important. The RBA tend to get uncomfortable when the Unemployment Rate is higher than 5% – and markets are expecting the rate to remain unchanged at 5.2% where it has been since April this year.

This week will also be important for the economic update on China, which will be publishing:

  • Industrial Output (trending lower, at its lowest level since 2002, and suffering from trade wars)
  • Retail Sales (trending lower, reached its lowers level since 2003 in April, and suffering from trade wars)
  • GDP (trending lower, equal to the lows reached in the GFC)

Chart of the Day – Chinese GDP Growth

The chart below shows China’s sliding GDP growth rate, which is expected to hit 6.2% when it is published later today – taking it below even the lowest level seen during the GFC (click to enlarge).