By Phil Lynch
The kiwi dollar is continuing its strong run and opens up 0.3% from Friday’s opening levels. The move higher came mostly on Saturday morning our time and was thanks (in large) to comments from two US Federal Reserve board members. Fed Vice Chair Richard Clarida noted he saw evidence of slowing global growth, which was having a cooling effect on the US economy. This sentiment was later supported by Dallas Federal Reserve President Robert Kaplan, who mentioned that global growth will be a bit of a headwind, which may spread to the United States. This was enough for markets to question the aggressive rate hikes from the US Federal Reserve, and this allowed the kiwi to make gains on the greenback.
This week is relatively light on economic data and central bank announcements. This will leave markets to focus on political and trade developments – where there is plenty of activity.
The last week has seen US-China tensions rise, as global leaders attended the APEC Summit in Papua New Guinea. US President Donald Trump did not attend the summit, instead sending Vice President Mike Pence. This was in stark contrast to Chinese President Xi Jinping, who arrived to great fanfare.
For the first time in their history, leaders at the summit have failed to agree on a communique. When Prime Minister of PNG, Peter O’Neill was asked why the 21 members could not agree, he simply referred to “the two big giants in the room”.
Vice President Mike Pence was quoted on Saturday as saying the United States will not back down from its trade dispute with China, and might even double its tariffs, unless Beijing bows to US demands. This contrasts with President Trump’s comments, where he said that he may not impose more tariffs on Chinese goods after Beijing sent the United States a list of measures it was willing to take to resolve trade tensions. The one message that is coming through loud and clear: more uncertainty lies ahead, and this has generally been negative for the New Zealand dollar.
The NZDGBP climbed 2.9% last week, taking the total climb over the last six weeks to 9.2%. This rapid rise is the result of Theresa May’s government struggling to get the numbers together to vote yes to the proposed Brexit divorce deal. The sharks have started circling May. Many are unhappy with the terms of the deal and once again, uncertainty reigns.
But it was May who launched a decisive counter-attack – warning that getting rid of her will delay Brexit. May told Sky News:
“These next seven days are going to be critical, they are about the future of this country. I am not going to be distracted from the important job. A change of leadership at this point isn’t going to make the negotiations any easier … what it will do is mean that there is a risk that actually we delay the negotiations and that is a risk that Brexit gets delayed or frustrated.”
Volatility due to Brexit related risks has been well forecast, but it is still unclear as to how this current scenario will play out, and we could experience further extreme volatility in the weeks to come. If May gets ousted – we can expect the NZDGBP to climb even further. If she gets her deal – then the NZDGBP will likely give back much of the recent 9.2% gains.
Kim Jong Un has hit the headlines once again, as he witnessed the test of a newly developed “ultramodern tactical weapon”. It was his first reported observation of a weapons test this year, which could complicate the already stalled nuclear talks with the United States. At this stage, it is unlikely this story will escalate or impact currency markets. But it is a timely reminder of the not-so-distant past when North Korea were threatening to launch Inter-Continental Ballistic Missiles at the USA.
Locally this week, key market information includes NZ GDT Dairy Auctions out Wednesday morning, and RBA Meeting Minutes out Tuesday afternoon. Neither is expected to have a huge impact, but these releases might draw some additional attention given the lack of data elsewhere.
The recent snapback in the kiwi has been well deserved, and in my opinion, more accurately reflects fair value. A kiwi dollar between 0.68 – 0.70 cents is arguably a good reflection of the underlying fundamentals. This move echoes the underlying strength in the NZ economy, which in the last month has shown to have higher Inflation and lower Unemployment than Business Confidence suggested we should have.
With just 42 days remaining in 2018, it is a good time to start thinking about what 2019 will bring for the New Zealand dollar. For longer-term views, I revert to key themes:
This all points to a stronger US dollar, and therefore a lower NZDUSD exchange rate. For some sound economics advice, look no further than this quote from Rudiger Dornbusch:
“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”
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