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The Week Ahead in FX Markets – Kiwi bounces back to 0.6800 as Trump sparks USD selloff

Published July 23, 2018

By Phil Lynch

The kiwi has bounced back from Friday’s lows, opening the week trading at 0.6800 cents (interbank levels). The US Dollar was sold heavily across the weekend as President Trump once again waded into unprecedented territory when he raised concerns about the US Federal Reserve’s planned rate rises. Both the NZD and AUD jumped by 0.8% against the greenback.

It’s likely President Trump’s actions will continue to dominate FX markets this week, given the light amount of data, and as North American officials take another look at their trade agreements. Last week Trump was active on the topic of trade, labelling Europe a foe and threatening to add tariffs to all of China’s imports.

Week Ahead (Outside of Trump)

Light Week Locally

New Zealand’s week ahead of data is particularly light, with just Trade Balance data to note on Wednesday. Our economic data release will liven up the following week, where we have an update on the ANZ Business Outlook (Tuesday 31st) and the Unemployment Rate (Wednesday 1st).

Australian CPI Data

This week Australian inflation numbers are released on Wednesday. Market expectations are for inflation to jump to 2.2% (from 1.9%). This data release, like the kiwi release last week, has the potential to surprise markets and offer a little support for the AUD.

ECB Rate Decision

The ECB meet this week to decide on rates and provide an update on their asset purchase program. This is an announcement that carries plenty of potential firepower – but will likely prove to be another fizzer. Everyone wants to know when the ECB will raise their rates – but it’s unlikely the ECB will give any firm guidance at this announcement.

US Data to Round Out Week

Later this week we have US Durable Goods and GDP data. Both releases carry the potential to shift the dollar – though I suspect by Friday (when the data is released) we may have already seen plenty of market activity resulting from US trade talks.

Opinion – NZDUSD

The NZDUSD has remained under pressure these past few weeks, as the stars aligned in favour of other currencies. The pressure has come both locally and afar.

  • Locally our business confidence has fallen through the floor.
  • Internationally the Fed are pursuing their course for raising rates, and Trump continues a loose fiscal policy.

These factors are all long-term factors and will continue to weigh on the kiwi for some time. This also means, that my long-term (12-month+) view on the NZD remains bearish.

Short-term, however, I am a shade bullish on the kiwi. It is my view that 0.68 – 0.70 cents represents fair value for the kiwi. Here are three key supporting factors:

First of all, the NZDUSD reacts to all types of market forces and the difficult to measure ‘sentiment’ has been a key determinant lately. There has been talk of record numbers of short bets on our currency (speculative bets that the NZD will fall). However, speculative bets tend to be shorter term by nature and unwind as investors lose patience. With many of these bets in place, and the kiwi failing to deliver the desired results, these short positions will unwind.

Secondly, it’s not all bad news for the kiwi economy. Our dollar has reacted heavily to Business Confidence, yet kiwi businesses have a habit of getting on with it. Our own inflation is showing positive signs. Rising inflation can have a powerful impact on currency markets – and markets like to get ahead of these results. Analysts have long been betting on rising inflation in NZ and last weeks numbers were a sign they’re on the right track.

Finally: President Trump, who is becoming more and more vocal about the current level of the US dollar. Trump has even moved into the unprecedented territory of criticising the supposedly independent US Federal Reserve. It is unexpected moves like this that we can rely on – kicking the US dollar whilst it is up.

Chart of the Week – Australian Inflation

This week we take a look at Australian Inflation – currently running at 1.9% and expected to jump back into the RBA’s range.