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The Week Ahead in FX Markets – Kiwi Dollar Suffers from Trade War | NZ Inflation Numbers | Brexit Update

Published January 21, 2019

The kiwi opens the week on the slide, as it heads back towards the middle of the 2019 trading range.  Last week was tumultuous in markets, mostly thanks to Theresa May’s Brexit vote getting the thumbs down, confirming the markets negative outlook for Sterling.

Meanwhile, the NZD/USD has been taking its direction from US political and trade war sentiment. Despite the ongoing US Government shutdown, it was the US dollar that was broadly stronger last week, following optimism on the trade talks between China and the United States. Media reports late last week suggested both the US and China were looking at concessions ahead of a Chinese delegation visit to the US in late January.

The week ahead is not all about politics, as we also have a handful of key market announcements, including:

  • Chinese economic data today
  • New Zealand inflation data on Wednesday
  • European Central Bank Rate Decision on Friday 

Trade Wars – Fake News?

It is now just ten days until Chinese Vice Premier Liu Hu visits the US, with the aim of resolving the trade standoff between the world’s two largest economies. To date, President Trump has been unrelenting with a tough stance on trade. However, with a direct correlation between Trump’s trade war rhetoric and equity market performance emerging, some now believe that the self-professed ‘Tariff-Man’ will need to start offering some concessions.

Reports of these concessions were first reported last week by the Wall Street Journal, with US Treasury Secretary Mnuchin quoted as saying the US is considering lifting some or all tariffs on Chinese goods. Later, a Treasury spokesman denied Thursday’s report – leaving markets unclear if this was in fact ‘fake news’. But the damage on the NZD/USD was done.

The week ahead will seek validation on the ‘news’. It is entirely possible that this will come in the form of a tweet from US President Trump – which only adds to market risk. Trump is desperate for a win, with the current Government shutdown now reaching a record 30 days causing his approval ratings to slump. What we do know is that the NZD/USD is sensitive to trade war news, and there will be more to this story released over the coming two weeks.

Brexit – What Now? And What for Markets?

There are still many options on the table for Brexit, but perhaps the most compelling is that Britain will leave the EU on March 29 with no divorce deal in place. Whilst there are many other possibilities (as outlined quite well by this article on the RNZ website), markets are now awaiting an update from Theresa May on what her new plan is. We should find this out tomorrow – and there is plenty of scope for volatility from this.

Unfortunately, there is no clear path for markets – this is entirely uncharted territory. Most, however, believe that Sterling will continue to suffer and that there may be global economic ramifications.

Economic Data

Chinese Data

Fears of a broader economic slowdown have crept into market’s thinking lately, with some even hinting at a possible recession. This makes today’s Chinese economic data crucial for broader market confidence. Data today includes Industrial Production, Retail Sales and GDP – all published at 3:00 PM NZ time.

The world’s second-largest economy has shown cracks lately, and these have been amplified by the ongoing trade war unrest. Today’s Chinese GDP number is expected to come in at 6.4% year on year, with some forecasters expecting a number as low 6.1%. To put this in perspective, China’s GDP low point over the past 25 years was 6.4% – and this was in heart of the GFC.

This is particularly important for the kiwi. Earlier on Jan 3, 2019, the NZD/USD dipped as much as 1.9% – triggered by a report that Apple Inc’s sale of iPhones in China was going to miss expectations. Official Chinese Government reports have the capacity to have a similar impact on markets.

Kiwi Inflation Numbers – Setting the Tone for 2019

The current outlook for NZ inflation (along with RBNZ’s rate decisions) is sluggishly neutral. So it will take something pretty special on Wednesday to change this view. It is arguably more important to focus on international developments (including Donald Trump’s tweets), than New Zealand inflation numbers on Wednesday.

That said – this is still a crucial indicator which local banks and analysts will use to formulate their 2019 view on the kiwi. Currently, inflation is sitting at 1.9%, and market expectations are for this to drop to 1.8%. So, the logic goes:

  • Greater than 1.8% = Kiwi positive
  • Equal to 1.8% = Kiwi neutral
  • Less than 1.8% = Kiwi negative

Markets have interpreted recent RBNZ comments as having a dovish stance, meaning they expect the next move is more likely to be a rate cut. Last quarters inflation, however, did surprise to the upside. So another strong number may cause markets to remove their dovish lean on the RBNZ. But anywhere from 1.7-1.9%  will not see the kiwi move far – that is right in the middle of the RBNZ sweet spot. 

ECB Rate Decision

This Friday the ECB will publish their latest decision on interest rates. The expectation is for no change to policy. The only expectation here is that the ECB reemphasise their cautious approach to policy normalisation amidst ongoing global economic uncertainty. 

NZ Inflation – Chart