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The Week Ahead in FX Markets – Kiwi caught up in contagion effect

Published September 10, 2018

By Phil Lynch

The kiwi dollar once again opens on the back foot, striking its lowest point since February 2016. For the first time in a long time, it appears the stars have aligned for exporters – here’s a quick run through of key themes dragging the kiwi dollar lower:

  • Poor business confidence at home
  • A booming US economy
  • Rising US dollar interest rates (thanks largely to the Fed)
  • Perceived dovish sentiment from the RBNZ
  • Mediocre commodity prices (dairy)
  • Global trade wars benefitting the US dollar
  • Emerging market meltdown contagion
  • Speculative short bets on the kiwi

It is hard to find a ray of hope for the kiwi amidst the gloom, and big banks are adjusting their forecasts accordingly – with ANZ now picking an 0.61 cent NZD/USD exchange rate for 2019.

Local Data – Light

There is little in the way of local data to spur on the kiwi this week. The most significant item on the regular agenda is Electronic Card Sales – out tomorrow at 10:45 AM. Usually this data release does not gain a lot of market attention, but this result might help to reinforce or bust recent confidence readings.

US Economy – Booming

There has been more great news for the US economy, with Friday night’s US Non-farm Payrolls numbers showing immense strength. There were 210k new jobs created in August, with the Unemployment Rate staying low at 3.9%, and Average Earnings rising by 2.9% – beating the market’s expectations of a 2.7% rise.

The strength in the US economy will inevitably start to feed inflation, which makes this Friday morning’s US CPI numbers a good one to watch out for. Rising inflation and low unemployment will continue to feed the Fed’s rate tightening cycle. Markets have almost fully priced in another 1% of rate hikes from the US Federal Reserve by this time next year. Current pricing shows a 96% chance of a hike when the Fed meet in two and a half weeks.

Markets still seem to ignore the elephant in the room, and that is the level of US debt – with the latest reading coming in at USD $14,979,579,832,500.

The Contagion Effect

Emerging markets have taken a hammering, and the kiwi is getting caught in the crossfire. Much of the fall in emerging markets is thanks to trade concerns – with a slowdown in China becoming a key component.

As recently as Friday, President Trump warned he was ready to slap tariffs on virtually all Chinese imports into the United States, threatening another USD 267 billion on top of the USD 200 billion primed for levies in coming days.

The Australian dollar has become something of a proxy for emerging market confidence, due to its close trade relations with China.

Despite industrial metal prices holding up well, the AUD has shed 12.5% since its January peak, and looks caught in a steep and steady downtrend pattern. When Australian markets sneeze, the kiwi catches the flu – and the New Zealand dollar is not doing well.

The risk averse environment looks set to continue and therefore this week will draw extra attention to Chinese data – and there is plenty to choose from including PPI, CPI, Industrial Output and Retail Sales. Closer to home the key data will be Thursday’s Australian Employment Report.

Of course this week will be about Trump – and what he does with tariffs.

Is there any good news for the kiwi?

We know that predicting exchange rate movements is a bit like tossing a coin – which should give us 50% chance of a snap-back for the kiwi. Below I outline a few such scenarios that could reinvigorate the NZD.

Business Confidence is not Business Output

Firstly – the kiwi is suffering in part due to low Business Confidence. However, this is a leading indicator that critics would say is more reflective of the current government than actual confidence. From my own discussions with business owners, CFOs, and company directors – there is definitely concern – particularly around minimum wage, tax, and other political hot cakes. However, I get a strong sense that businesses are getting on with it – and so far output remains stronger than confidence suggests.

November Mid-Terms

President Trump has mid-term elections to contend with – and is currently facing a lack of confidence from the public. His tough talk on trade with countries like Canada and China are not entirely popular. He may be forced to back off tough talk to regain the support of the US public. Alternatively, if Trump were to lose control at the mid-term elections, it would make for a quieter two years.

Speculative Short Bets

There are a number of speculative short bets that have been placed on both the NZD and AUD – bets that our currencies will fall in value against the US dollar. These bets only work if our currencies keep falling – and by nature currency speculators will begin to take profit on these bets. This could trigger an unwinding of these large short positions, with demand for the kiwi soaring.

Analyst Picks

Today we include the most recent Reuters analysis for the NZD/USD. As you can see, there is in fact a more bullish sentiment among the 40+ professional analysts polled last Wednesday. You might need to click the image to enlarge it. Here are the highlights:

  • The bottom pick is 6.6% below current levels
  • The median pick is 5.7% above current levels
  • The top pick is 17.9% above current levels