By Phil Lynch

The New Zealand dollar opens the week on the back foot once again, having slipped after the U.S. Non-farm Payrolls report was published. The report featured a strong headline number which showed 224k new jobs were added in June, beating expectations of 160k. The headline was enough to send the kiwi almost 1% lower, as markets pared expectations of an aggressive 0.50% rate cut from the US Federal Reserve when they next meet at the end of this month.

It was not all good news from the report, however, with the Unemployment Rate rising to 3.7% and Average Hourly Earnings dropping to 3.1%. The strong June number was following on from a particularly weak May number, where only 72k new jobs were added. On balance, the report was more of a wake-up call to markets, that the US Federal Reserve may not be as aggressive with their rate cuts as many are hoping.

This week there are several minor speeches from Federal Reserve members, and it is likely we get further confirmation from them that we should expect only 0.25bp of rate cuts later in July. We will also get to view the Meeting Minutes from the FOMC’s June meeting. Further rate cuts from the Fed will no doubt remain sensitive to data – and this week’s data includes the important CPI numbers.

Key U.S. Data Ahead – Inflation

U.S. Inflation data is due Friday morning at 2:00 AM NZ time. Inflation in the U.S. is facing the same challenges as other countries around the world, where it is simply struggling to return to ‘normal’ levels. Rising inflation plays its part in growing an economy, and many believed that Trump’s trade war with China would cause prices to rise (a side effect of tariffs). However, secular trends of low-cost online shopping and industrial automation are keeping prices in check.

Inflation is a key factor in the US Federal Reserve’s rate decisions, and this week we are expecting a flat month on month number (0.0%), with the year on year number falling to 1.6%. This is down from 1.8% in May, and down from 2.0% in April. The central bank is responsible to target 2.0% inflation, and so a 1.6% inflation number will well and truly justify rate cuts later in July.

Bank of Canada to Hold Rates

This Thursday morning at 2:00 AM the Bank of Canada is expected to hold rates at 1.75% – despite other central banks around the world looking to slash rates. Whilst the bank remains concerned about global trade, it has been somewhat upbeat with their expectations. Economic growth in Canada jumped from 0.4% to 1.5% in Q1 thanks largely to the surge in the energy sector.
For now the NZD/CAD remains subdued, down 5.3% over the course of 2019. The downtrend looks set to continue, unless we see the Bank of Canada join in on the chorus of central banks looking to cut rates.

Local Data Calendar

This week is light on local data in both Australia and New Zealand. The next big event for New Zealand is our inflation data due on the 16th of July – which will likely play a part in the RBNZ’s OCR decision when they meet next on the 7th of August. Markets are now pricing in a 72% chance of a rate cut at this meeting.

NZD/USD Forecasts

Personally, I remain bearish on the NZD/USD given the ongoing downturn in global conditions. This week I share forecasts from some of world’s leading banks on where the NZD/USD will be in 12-months. These banks have armies of analysts – yet come up with drastically different views. As always with currency, this highlights the importance of protecting your business before second guessing the exchange rate.