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The Week Ahead in FX Markets – Inflation data touted as key event, as kiwi benefits from risk sentiment

Published April 15, 2019

By Phil Lynch

Currency market volatility remains low this week and New Zealand dollar opens within familiar territory at 0.6755 against the greenback. This is small victory for the kiwi, which faces continued pressure from a significantly more dovish RBNZ outlook. The kiwi is up against most major trading partners, but exporters to Australia can collectively breathe a little easier, with the NZDAUD into the low 0.94’s.

The week ahead will focus on inflation, with key inflation readings due from the UK, the EU, Canada, Japan, and of course the New Zealand dollar.

New Zealand Inflation

New Zealand’s inflation data is released by Statistics NZ on Wednesday morning at 10:45 AM. Market expectations are for price rises of 0.3% for the first quarter of 2019, taking the year on year number to 1.7% (a drop from 1.9% in the previous quarter). The low expectations are largely down to oil and fuel prices.

If it comes in at 1.7%, inflation is sitting comfortably within the RBNZ’s target range of 1-3%. It is also above the RBNZ’s own forecast of 1.6% (from their February MPS). Either way, it is still shy of the mid-point 2% target, but does it really validate the shift to a dovish stance from Governor Orr and the committee? Some interesting points to note from the RBNZ’s most recent MPS:

  • Year on year inflation is forecast to drop to 1.2% by the September quarter
  • The OCR is forecast to stay on hold before rising in 2021 (despite the more recent comments that “the more likely direction of our next OCR move is down.”)

My take on local inflation is that it will be on the softer side, but that the RBNZ will still adopt a very neutral approach for the next several years. I still see a rate cut as unlikely, and any movement in the OCR will pale in comparison to movements in the Fed Funds Target Rate (US Central Bank rates), where expectations have been shifting rapidly.

International Focus – Brexit

It almost feels relieving to say that this can has been kicked down the road (again), this time for up to six months. None of the problems that come with Brexit have gone away, but it is now unlikely we will hear anything substantial for months. For now, Prime Minister May is meeting with opposition leaders to search for compromise.

International Focus – US-China

There are obvious concerns that the US-China trade tensions are spilling over into slower global growth, and this has been well noted by many including our own RBNZ. However, US Treasury Secretary Mnuchin said on Saturday that a US-China trade agreement would go “way beyond” previous efforts to open China’s markets to US companies and hoped that the two sides were “close to the final round” of negotiations.

Optimism around a trade deal is growing, and this is, in turn, spurring on risk-sensitive currencies like the New Zealand dollar. Whilst there is no deadline for a deal being announced just yet, progress is being made and now more than ever it looks like a positive trade deal will be struck.

Key Events to Watch 

This week is littered with economic and central bank releases. I will be looking at four in particular:

  • AUD RBA Meeting Minutes – Tuesday at 1:30 PM. Have the RBA painted an accurate picture of their interest rate outlook? Will the AUD continue to strengthen sending the NZDAUD lower?
  • AUD Unemployment Rate – Thursday at 1:30 PM. Will this continue around the 5.0% mark or will it show some of the trademark volatility that sometimes comes with this release?
  • NZD CPI – Wednesday at 10:45 AM. This one is touted as the key event for the NZD this week. My opinion is that this should only be considered ‘key’ if we see a big miss from market expectations.
  • CNH GDP – Wednesday at 2:00 PM. At a time when US-China trade relations are so key for the global growth outlook – Chinese GDP will be the key event for me this week, as the key market of global risk sentiment.