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The Week Ahead in FX Markets – Kiwi Drifts Lower | 2020 Theme’s Recap

Published January 13, 2020

By Phil Lynch

Welcome back to those returning this week, and Happy New Year. The kiwi dollar’s been on a roller coaster ride across the last 6-weeks. There was a substantial Santa rally in December which saw the NZD/USD jump 5.0% across the month. Since then, however, geo-political tensions and a risk-off sentiment have seen the kiwi give up a good chunk of those gains.

2020 Theme Recap

Many of the key themes of 2019 will carry into 2020. These include:

  • Interest Rates – whilst there are no changes on the radar for January, a generally dovish market outlook means we’re likely to see further rate cuts from many major central banks in 2020.
  • Trump Impeachment – with the House poised to move impeachment charges to the Senate this week. This will potentially be a sideshow – but naturally is one event to keep tabs on.
  • Trade Wars – a somewhat lacklustre, low on detail, but still encouraging ‘Phase One’ agreement is due to be signed this week.
  • Geo-Political Unrest– a potential escalation in the conflict between Iran and the U.S. keeping everyone on their toes.
  • Election Year– both the U.S. and New Zealand heading to the polls in 2020. The U.S. election is likely to have a greater impact on markets than most events this year.
  • Brexit – Britain will finally leave the E.U. and initiate talks for a new trade agreement.
  • The Unknown – as always, we can expect the unexpected

What to Expect in Currency Markets

2019 has taught us to challenge the status quo – with tweets from President Trump often mattering more to currency value (and direction) than the underlying economic performance. 2020 is likely to see more of the same given some of the major events expected.

Last year also taught us that the NZD/USD can be surprisingly resilient. In 2019 the NZD/USD had the lowest annual trading range since 2001, of just 7.4 cents. The normal range for the NZD/USD on average over the last 20 years is 13.4 cents. The highest range was 30.3 cents in 2008.

2020 is likely to bring more volatility than 2019, and the ingredients are there for a significant market move. However, it is expected that this volatility will return later in 2020. Volatility is likely to be stirred through sentiment from the Fed, the U.S. election, or from another unforeseen circumstance.

What About the New Zealand Dollar?

The kiwi dollar is uniquely poised in 2020. We have record low unemployment, relatively strong GDP growth, solid commodity prices, and a Government that is expected to open the cheque book and spur on the economy. The RBNZ is likely to remain accommodative, with markets torn as to whether we’ll see another rate cut from the RBNZ.

The current levels of the NZD have already factored in our record low OCR rates, and this leaves me believing that the kiwi on its own merits should outperform. However, we know that the direction of the NZD (the 10th most traded currency in the world), does not always choose a direction based on its own merits. If only we could anticipate the next moves of President Trump, we might be able to develop a more reliable view on the currency.

Our inflation data will be the next major release, and the Q4 2019 number is published on 24 January. Currently, inflation is running at a lacklustre 1.5%, but has been expected to head back towards the 2% mid-point target.

Economic Data

Friday night saw the release of disappointing U.S. Nonfarm Payrolls data. Only 145k new jobs were added, against the 164k expected. Average Earnings was up 2.9% (YoY), vs expectations of 3.1%.

This week brings additional U.S. and Chinese data to the mix. It kicks off with U.S. Inflation numbers out on Wednesday. Federal Reserve Policymakers have revealed they are concerned with the level of inflation which currently sits at 2.1%. Markets are expecting a slight improvement on that at 2.3%.

On Friday we see a flurry of Chinese economic data released, which will tell us how their economy is coping with the trade war. GDP growth is expected to come in steady at 6.0%. However, Industrial Output and Retails Sales are both expected to drop, to 5.9% and 7.8% respectively. This data will be a telling sign in a week where the ‘Phase One’ trade agreement may get signed.