By Phil Lynch
The New Zealand dollar opens the week at fresh 5-month highs this morning, following the agreement for a 90-day halt in the trade war between the US & China. President Donald Trump met Chinese President Xi Jinping at the G20 summit in Buenos Aires, and the White House said on Saturday that neither side would add further tariffs for 90-days, which had previously been planned for the 1st of January. Additionally, China has agreed to buy a “substantial” amount of agricultural and other product from the US, in what Trump is describing as an “incredible deal”.
This has given markets renewed optimism – further boosting risk sensitive currencies like the NZD. However, if no deal is reached within 90-days, then both parties agreed that the existing 10 percent tariffs would be lifted to 25 percent.
The week ahead looks set to remain focused on trade, with our own kiwi dollar showing how sensitive markets are to changing trade conditions – with the NZDUSD up 1.0%, and the AUDUSD up 1.1% (from Friday’s opening level). There is little in the way of local kiwi data this week, with GDT Dairy Auctions being the highlight early on Wednesday morning. As such, focus will shift to offshore data – most of which is out of Australia and the US.
The week ahead is busy for the Aussie dollar, with a series of key announcements being kicked off with tomorrows RBA Rate Decision. The RBA is expected to keep rates at record lows of 1.50%, and the latest Reuters Poll shows most economists are expecting no change until 2020. This will leave analysts to sift through the details of the statement to try and find clues as to when the RBA’s next move may be.
The RBA decision will be followed by other key announcements, including GDP on Wednesday, and Retail Sales data on Thursday. Economists are expecting Australian GDP growth to remain strong with 3.3% annualised growth.
It is also a big week for US data, with the week being marked by US Non-Farm Payrolls. Markets are expecting 200k new jobs to be added in November, with the Unemployment Rate staying at record lows of 3.7%, and Average Earnings maintaining a 3.1% annual growth rate. All these expected results show signs of real strength in the US economy.
The kiwi has bounced back aggressively over the past few weeks and moved to a more ‘comfortable’ level between 0.68 – 0.70 cents. This level reflects the 2018 mid-point almost perfectly – so it would be hard to argue too much against these levels being fair.
However, the move higher has come quickly – and not all market indicators have kept up. 2018 has been a year where real interest rates have driven the New Zealand dollar, and these can be measured by the spread between US and NZ 2-year treasury yield. This spread currently sits at -0.98%, which means that US dollars earn 0.98% more interest than NZ dollars across 2-years.
The New Zealand dollar has had a strong correlation with this 2-year treasury yield spread, but this has changed drastically in the past 2-weeks. So, the question for me is if the well justified correlation has been broken, or if the New Zealand dollar has overshot the mark and is due for a fall?
The chart below highlights (with red circles) the previous points across 2018 where the NZD bolted higher when the treasury yield spread was weakening. In almost every case this has been followed by a sharp correction in the NZD lower.
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