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The Week Ahead in FX Markets – Kiwi bounces off low as trade tensions fester

Published July 9, 2018

By Phil Lynch

The New Zealand dollar opens higher this week, bouncing back by 0.7% against the greenback since Friday. The NZDUSD has now bounced more than 2% off the lows reached last week, but it is still too early to tell if things are stabilising once again for the flightless bird.

The weekend move was largely thanks to Saturday morning’s US Nonfarm Payrolls report. The report showed the headline number of new jobs created increased by 213k in June, but also showed the Unemployment Rate jump to 4.0%, with earnings only rising by 0.2%. These reports are going to attract additional scrutiny for the balance of 2018, with the US Federal Reserve indicating that their two rate hikes will be data dependent. For now, markets are still pricing in a 77% chance of a rate hike in September.

Economic Announcements Ahead

The week ahead is relatively quiet on the data front. Key data includes inflation data out of China and the US. The US data will attract the most attention given the uncertainty around the Fed’s plans for rate hikes.

This week also includes the Bank of Canada’s Rate Decision. The central bank is poised to raise rates for the first time this year, to 1.50%. The banks’ pace of policy normalisation has been slow and will continue to be slow – but for now, at least, it is slowly returning to normal.

Focus on Tariffs

China-US tariffs enacted on Friday have so far had a limited impact on markets. However, concern remains that the $34 billion in tariffs are the tip of the iceberg, with President Trump warning the US may target more than $500 billion worth of Chinese goods. The threat of a full-blown trade war poses a huge risk to markets, and the kiwi is known as a risk-sensitive currency.

NZDUSD Forecasts

Thomson Reuters has just published their FX poll results for July. The poll collates the forecasts of the world’s leading banks to paint a picture on where the kiwi may head next.

Over the next 12-months, bullish analysts include Citibank (0.73), UBS (0.71) and NAB (0.71). Bearish analysts include ANZ (0.65) and Westpac (0.65). As this poll typically shows, there is no consensus on where the dollar is heading next. The highest and lowest forecasts have a typically wide range from 0.62-0.78 – as shown in the chart below. All in all, the median forecast sees the kiwi rising to 0.70 cents over the next 12 months.