By Phil Lynch
The kiwi dollar climbed back into the mid 0.65’s over the weekend, as US economic data shows signs of a slowdown. Data from Friday night showed that new orders for US made capital goods were weaker than expected, providing further evidence that the US economy may be suffering from a manufacturing slowdown.
The pressure, however, remains on the New Zealand dollar as trade tensions between the world’s two largest economies keep markets in a perpetual state of unease. This coupled with the low interest rate environment and dovish outlook from central banks means there is little in the way of positive news for the New Zealand dollar.
Tensions in the trade war appear to be simmering at a steady pace without an end in sight. China on Friday accused the US of lying, with Chinese Foreign Ministry Spokesman Lu Kang stating US politicians “fabricate lies to try to mislead the American people, and now they are trying to incite ideological opposition”.
The trade war is having a very real impact domestically in the US. One obvious example is soybean exports, which are the most valuable US farm export. These were down to a 16-year low in 2018. Trump is now planning to provide as much as $15 billion in aid to help US farmers. Many of these farmers are Trump supporters – and if Trump is going to be re-elected in 2020 then he will need to continue to win their support. Trade wars look set to be a political football for Trump and tensions could continue for years to come.
This week is stacked with crucial US economic data, including Consumer Confidence, GDP & Consumption. The headline will be US GDP data, which is released early our Friday morning. Trump has repeatedly stated that GDP would be higher if only the US Federal Reserve hadn’t raised rates so aggressively in 2018 – and he is right to be concerned that GDP could fall short of the 3.1% annualised rate that has been forecast. The week of US data is rounded out by Consumption data – which is the pillar of economic growth within the US. Whilst it is difficult to anticipate which way the numbers will fall, we can anticipate that it won’t all be plain sailing for the NZD/USD this week.
The RBNZ in action once again, but this time their focus will be on financial stability. Whilst this does not typically have a direct impact on exchange rates, the central bank are working hard to improve stability by increasing bank capital requirements – this ongoing project will inevitably cause banking costs to rise. The Financial Stability Report is published on Wednesday, and Governor Orr will also be addressing a Parliament Select Committee.
Business Confidence has taken a huge hit in New Zealand since the Labour led government took power. Yet this Wednesday’s Business Confidence Survey will be the first since PM Jacinda Ardern ruled out a Capital Gains Tax. We can expect to see an improvement in business confidence as a result. Previously the large fall in confidence was coupled with a large fall in the NZD – so perhaps a recovery will offer some limited support to the struggling NZD.
The Labour led government might be able to score some points with the business community by ruling out a Capital Gains Tax, but this week they will face another test when they release details of their first ever ‘wellbeing’ budget. This budget will go beyond traditional economic performances measures, and look to address broader issues – but we are yet to get a real sense of what this means.
It is anticipated that additional targets will in turn add to the volatility and uncertainty for New Zealand businesses and may offset any improvements to confidence following the cancelled CGT. Budgets don’t typically have a significant impact on exchange rates, but this one might have a serious impact on the business community.
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