Happy New Year to you all and welcome to our first Week Ahead in FX Markets for 2019. I trust you all managed some rest and relaxation over the break. As per usual, FX markets did not rest – and there has been plenty going on which has been difficult to keep tabs on. So today we begin by reviewing some of the key themes that were bubbling away over the break.
There was no December ‘Santa’ rally for the kiwi, which ended down 2.7% across December. 2018 saw the NZD fall 5.2% across the entire year, though it traded in a 13.6% range which is far lower than normal.
2018 was a hawkish year for the Fed, where they raised rates to 2.25-2.50% and began unwinding their QE program. However, late in December, the Fed shifted to a less hawkish stance. The Fed’s own dot plot shows the median forecast of Federal Reserve board members is that the Fed Funds Target Rate will rise to 2.75-3.00% by the end of 2019 (meaning two further rate hikes in 2019). Fed Chair Jerome Powell has since pledged patience, and markets have become even less confident – currently pricing in no changes to Fed Fund Rates in 2019.
There was speculation (thanks to a Trump tweet), that Donald Trump was planning on firing the Chair of the US Federal Reserve Jerome Powell for raising interest rates. However, President Trump can only fire Powell if he has broken the law. Trump’s issues don’t stop there, given all of the Fed board members voted to raise rates in December – and he would have a hard time firing all of them.
This would be an especially dangerous move given the Fed’s independence is a pillar of market confidence. When Powell was asked by media if he would resign if the President asked him, he simply replied, “No”.
For those that were here last week, or had orders in the market to buy NZD, you might’ve noticed the flash crash late last week. In a matter of minutes, the AUD/JPY plummeted 5%+, the NZD/JPY 3%+, and the NZD/USD 1%+. Yet these pairs all recovered the lost ground shortly afterwards. The sell-off was triggered by a change in guidance from Apple Inc, which caused their own share price to gap lower. This takes Apple’s stock price decline to a total of 36% since October. Reportedly, this led to the triggering of automated stop-loss orders for Japanese investors in the Aussie dollar.
Thankfully the crash was short-lived. However, this was a timely reminder that markets can move rapidly. Moves like this have previously been a red-flag and a harbinger of stress for global markets.
The US Government shutdown is continuing this week, as President Trump refuses to bend in his demand for a wall, as Democrats refuse to fund it. The resulting shutdown leaves hundreds of thousands of federal workers idled and without pay. Trump has threatened to keep the shutdown running for months or years. More than anything this adds to the uncertainty in markets in 2019, and is perhaps a precursor of how US Politics will play out in 2019, with the Democrats controlling the House.
One item on the agenda that Trump can still influence is international relations. With global markets starting the year on the back foot, this offers Trump the opportunity to make amends by repairing relations with China. The 90-day ‘truce’ is still underway but there are no clear signs of what will happen next in the so-called trade war. On Sunday, Trump told reporters that China’s economy is “not doing well” and that he thinks it gives them “a great incentive to negotiate”.
Friday’s US Labour Report came through far higher than expected, with 312k new jobs added to the US economy in December. Average earnings also climbed to 3.2%. The labour market continues to stay strong in the US and low unemployment is forcing employers to start raising wages.
There will be a lot of hot air over the next 9 days, as markets await the outcome from the January 15 Parliamentary vote on the latest Brexit package. Prime Minister May has warned that Britain will be in uncharted territory if her Brexit deal is rejected. The March 29 Brexit date is fast approaching and the upcoming vote will be crucial. Either way, we can expect large swings in the NZD/GBP.
After hearing what is going on elsewhere, you might want to repack the car and head off on another few weeks of R’n’R. The good news is that New Zealand continues with their stable long-term development. Dairy prices are consolidating, GDP growth remains relatively strong, Unemployment remains low, Inflation remains steady within the target band. The message here is that the outlook for the NZD is going to continue to be very neutral in 2019. Our next major economic release is our Q4 inflation data on 23 January.
Today’s Daily Rates show the % change from our last update on 21 December 2018.
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