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The Week Ahead in FX Markets – Is the ‘Santa Rally’ real? We analyse this amidst US, UK, and EU events

Published December 10, 2018

By Phil Lynch

The kiwi opens the week having pulled back from its recent highs. It is now settling in towards the bottom of its fair-trading range between 0.6800 & 0.7000 cents. The pullback in the kiwi went against the grain somewhat, after the slightly weaker than expected US jobs numbers from Friday night. US Non-Farm Payrolls showed just 155k new jobs were added in November, vs expectations of 200k.

There is little in the way of local data in the week ahead, so we look offshore for what will drive the kiwi.

Offshore Releases to Drive NZDUSD and NZDEUR 

The next big New Zealand dollar announcement is not until our GDP numbers are published on Thursday, 20 December. So, until then, markets will focus on offshore economic and central bank releases.

US Data

Month on month CPI is first up and is expected to flatline for November, with the year on year inflation number dropping to 2.2%. Whilst still near Federal Reserve targets, at 2.2% questions will be asked of the US Federal Reserve’s rate tightening cycle. The Fed is widely expected to raise rates when it meets on 20 December, with markets pricing in a 72.9% chance of a rate hike.

European Central Bank Decision

Early on Friday morning, the ECB are releasing their decision on interest rates and their quantitative easing program. Speaking at the European Parliament late last month in Brussels, Mario Draghi confirmed that the ECB would likely phase out QE after December and indicated this will be formalised at the ECB’s policy meeting. This comes at an awkward time for the Eurozone, with GDP facing issues which have been blamed on Germany’s steep decline in car production and the contagion effect of Brexit. The scenario is summed up well by the ECB’s Chief Economist, Peter Praet:

“Significant monetary policy stimulus is still needed… The end of net asset purchases is not tantamount to a withdrawal of monetary policy accommodation.”

Markets will be looking at the outcome of this meeting closely, with a particular focus on any potential interest rate guidance provided by the ECB.

Brexit – What Could Go Wrong?

In a weekend where the kiwi was mostly lower, it has still managed gains of 0.2% against Sterling.  The next move for the NZDGBP hangs in the balance, as Theresa May aims to win a majority for her Brexit deal in a vote on Wednesday that will define Britain’s departure from the European Union.

The odds looked stacked against her – which will likely see Sterling lose further ground and force the UK to explore other options (for example, leaving the EU with no deal, or a second referendum).

US-China Trade Deal Deadline

The US has announced that a trade deal will need to be reached by the 1st of March, 2019, or new tariffs will be imposed on China. This deadline provides the two super-powers ample time to come to a deal. However, this falls at an awkward time for kiwi businesses who may be budgeting for the new financial year. An escalation in the trade war could see volatility increase and has been negative for risk-sensitive currencies like the NZD.

Wall Street – Leading the Risk Sensitive Currencies

The Dow Jones Industrial Average is down another 0.8% from Friday’s opening levels, and market participants are hoping to get 2018 over and done with as soon as possible. It will be the first year since 1972 where bond and equity markets from the US to emerging markets have all lost money for asset holders. This weakness has been mirrored by commodity and risk-sensitive currencies like the kiwi dollar. This will likely be an ongoing theme for the coming weeks, particularly as equity market volatility remains high.

Is the Santa Rally Real?

The chart below shows the rise and fall for the NZDUSD across December for the last 20 years. The theory goes that the kiwi dollar often rallies over the Christmas period – perhaps due to international markets squaring up positions ahead of year-end.

If you ask me – if you think relying on a Santa Rally is a good idea, then you might as well believe in the big man himself. However, markets sometimes operate in patterns and one of these is a positive December for the NZD. Here are some of the stats, and a chart showing the kiwi’s performance in December:

  • Over the last 20 years, the NZDUSD has added a total of 2,215 points in December – or 22.15 US cents
  • The rolling 5-year average (as shown in the chart) has been positive for the last 20-years.
  • The average gain across December is 113 points or 1.13 US cents
  • Of the last 20 years, just 5 years have proved to see a decrease in value for the kiwi
  • December 2018 is starting off at a high level of 0.6904 – if we see the average points rise, the kiwi will finish at 0.7017