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The Week Ahead in FX Markets – Kiwi struggles to recover lost ground

Published February 17, 2020

By Phil Lynch

The flightless bird remains as grounded as Air New Zealand flights to and from China, as we are head into yet another week where headlines will be dominated by the coronavirus.

On a trade weighted basis, the kiwi dollar is down almost 2.5% since the virus first started hitting mainstream media headlines. Against safe-haven currencies like the USD and JPY the kiwi is down 4.5% and 3.5% respectively.

There are now a reported 57,972 cases of the virus, with 56,249 of them confirmed in the Hubei Province (97%). There have been 1,665 deaths (2.8%), with 9,419 confirmed recoveries (16.2%). The next stage of the virus is in the balance, but the potential for a broader outbreak is somewhat reduced, thanks to the effective containment thus far. This could lend itself well to a NZD recovery over the coming weeks.

Coronavirus: NZ Economic Impact

Whilst it is still too early to draw any final conclusions, early reports are that the coronavirus could wipe as much as 0.3% from our first quarter GDP growth. However, the RBNZ last week indicated that a rapid bounce back in GDP can be expected, so long as there is no outbreak in New Zealand, and that the virus is largely contained by the end of February.

Some of the industries most impacted are the service industries, tourism and education. Chinese tourists make up approximately 11% of arrivals to New Zealand. Meanwhile the travel ban is preventing 41% of Chinese students from arriving on time to begin the semester – likely costing the universities $170 million in fees.

All in all – the outbreak has not yet been enough to cause the RBNZ to consider additional rate cuts. In fact, last week’s MPS provided projections that the next move in the OCR would in fact be a 25 basis-point rise towards the end of 2021. This flies in the face of market expectations, which are still pricing in a near 50% chance of a cut at some stage in 2020.  

The Week Ahead

Close to Home

This week ahead is somewhat quiet from a local data front, with the highlight being Wednesday morning’s GDT Dairy Auctions. This could gain more attention than usual, with commodity prices being more volatile currently and given so much of our dairy production is exported to China.

The RBNZ has made the assumption that dairy prices will remain near USD $3,000 per metric tonne. The most recent auction saw prices at USD $3,226 per metric tonne, which was down 4.6% from the previous auction. 

Another commodity to watch is oil prices, which have remained subdued near USD $52 per barrel. This, in theory, should have a stimulatory effect on our economy given it’s well below recent levels. It is also well below the RBNZ’s assumption of oil prices remaining near USD $60 per barrel.

In summary – dairy prices are 7.5% higher than the RBNZ’s assumption, whilst oil prices are 13.3% lower than the RBNZ’s assumptions – both good signs for the economic potential of New Zealand.  

Across the Ditch

We will get a good look at the Australian labour market this week, kicking off with the release of Wage Price Index on Wednesday, with wages expected to grow at 2.2%. This is followed with the Unemployment Rate on Thursday, which the RBA is hoping to see dip below 5.0% before they’re confident enough to remove their dovish bias. 

Currently markets are pricing in a full 25 basis point rate cut from the RBA by October, but there is every chance this could happen sooner given their economic conditions following the virus outbreak and the bushfires.

The RBA are also delivering their February meeting minutes to the market on Tuesday.

Further Afield

It is not just the RBA that is releasing their meeting minutes this week, with similar reports coming out from the U.S. Federal Reserve and the European Central Bank. These are always examined closely.

We can expect a slow start to the week with the President’s Holiday in the U.S. today giving markets another chance for a breather. But it will likely be the coronavirus that continues to have the largest impact on our currency.