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Market Update

EncoreFX’s daily market updates are written by our experienced and professional dealing team.

The Week Ahead in FX Markets – Kiwi consolidates; Quiet data week; Focus on politics and interest rates

Published October 23, 2018

By Phil Lynch

Welcome back to everyone after what we hope was a relaxing long weekend. Foreign exchange markets can be chaotic at times, but this long weekend the New Zealand dollar continued its well-trodden path from the previous week, spending most of its time consolidating between 0.6540 and 0.6590. Consolidation seems to be a key theme currently, as markets brace themselves for the upcoming US mid-term elections in just two weeks time.

We start today with a quick look at the week ahead (which is relatively quiet on the data front), followed by a broader update on the New Zealand dollar.

Week Ahead – Light on Data

This week is very light on data locally, with just NZ Trade Balance numbers to note, due out on Thursday morning. Offshore data is also somewhat light, with the exception of three key announcements:

The Bank of Canada is expected to raise rates to 1.75% this week. It’s been a volatile few months for the NZDCAD, which lost as much as 12% of its value since March, before recovering 3.5% of that in the last three weeks. The Canadian dollar has struggled lately amidst growing trade tensions, European political uncertainty, and declining global equities.

The next major event is the ECB Rate Decision, where Mario Draghi is expected to keep rates on hold, with no changes expected to the current course. At this rate, the ECB will end their QE program in December, with the first rate rise not likely until late 2019. It’s possible this event is something of a fizzer given the outlook – but as always this carries some event risk.

US GDP numbers are due out on Friday, and markets expect the annualised number to slow to 3.3% for Q3 from the 4.2% previously. Anything short of 3.3% might unsettle the recent US dollar strength, but for now, the expected 3.3%+ is a blistering result most developed nations are only dreaming of.

Brexit Latest

Theresa May has said most of the Brexit deal has now been agreed upon. Markets, however, have not shown the same level of confidence as May, with the NZDGBP bouncing 3%+ from the low two weeks ago. A trade deal is still to be reached and Irish border issues in the negotiations have caused something of a stalemate. Meanwhile, some media outlets are reporting that May should prepare for a serious leadership challenge. One thing for certain is more uncertainty.

Markets Bracing for US Midterms

FX markets have started to show signs of nerves ahead of the US midterm elections just two weeks away. Current polling suggests that Democrats will win the House of Representatives, with Republicans winning the Senate. A divided Congress could mean government gridlock. Here are some key pointers:

  • The event risk for the midterm elections is currently lower than the 2016 presidential elections, but still poses one of the most significant risks for the NZD over the coming months
  • FX market volatility has spiked, indicating heightened risk over the coming weeks
  • The US Federal Reserve will likely continue with their rate rise course regardless of the outcome.
  • FX options markets are showing a bearish skew towards the US dollar ahead of the election

Elsewhere

  • Italy (the eurozone’s third largest economy) has had its credit rating downgraded to “Baa3” by Moody’s, but has surprisingly maintained a stable outlook.
  • Concerns over Rome’s expansive budget plans have weighed heavily on Italian government bonds in recent weeks, with the spread between German and Italian benchmark 10-year paper hitting 5-1/2 year highs on Friday.
  • Amidst share market volatility, the Shanghai Stock Exchange jumped more than 4% yesterday, extending gains made from Friday.

The Kiwi – Where-to Next?

The sustained downturn in the kiwi dollar has forced markets to reset their expectations on ‘where-to’ next for the flightless bird. The downtrend in the kiwi has become very well established – but are trends made to be broken?

Key to the downturn in the New Zealand dollar has been the changing interest rate environment, both at the Federal Reserve and government bond level. It is well documented that US interest rates are on the rise, and are set to continue to rise well into next year. Whilst there is some uncertainty surrounding Trump-based USD strength, there are strong signs that rising US interest rates will continue to fuel demand for the USD.

Chart of the Week – US 2 Year Interest Rates vs NZD/USD