By Phil Lynch
The NZDUSD opens down 1.1% from Friday and is set to face a challenging week that is stacked with economic releases and central bank announcements. The two stand out events this week will both be hitting us on Thursday morning, with the US Federal Reserve’s Rate Decision followed by NZ GDP data.
The weekend move lower was a flight to safety – with both the NZDUSD and NZDJPY both hit the hardest. Safe-haven currencies like the USD and JPY do well in times of uncertainty, and this week brings plenty of it. The ‘risk-off’ environment has escalated with tensions in the Strait of Hormuz – with the Trump Administration saying that if Iran closes the Strait, that “it’s not going to be closed for long”.
This week’s key piece of economic data will be our own GDP data, due out Thursday at 10:45 AM. Markets are expecting quarter on quarter growth of 0.6%, with year on year growth of 2.4%. Whilst this would still be a slight improvement on last quarters 2.3% annual growth rate, it is far from an ideal level of growth.
The number itself is reflective of the global uncertainty that has gripped markets. It will also have an impact on the outlook for the RBNZ’s Rate Decision next week. The RBNZ are releasing their decision in 9 days (Wednesday, 26 June). Markets are mostly expecting the RBNZ will stay on hold at 1.50% but have priced in a 27% chance of a rate cut. The GDP numbers will help markets to firm up their outlook for the OCR – which most believe should be cut to 1.00% over the next 6-12 months. Expectations are for the next OCR cut to be made in September – but there are no guarantees.
On Thursday morning at 6:00 AM the US Federal Reserve will announce their decision on the Fed Funds Target Rate. Markets are expecting the Fed to keep rates on hold at this meeting. However, expectations are that the bank will confirm their intentions to start a program of rate cuts that could move the rate 1.00% lower over the next 12 months.
For now, chances of a rate cut on Thursday are just 23%, so the big question is if the Fed will confirm the need to begin cutting rates from July. The Fed faced huge criticism from both President Trump and equity markets over their aggressive rate hikes in 2018 – it may look like the Fed is bowing to the pressure, but the reality is that global economic performance is in a slump – and the Fed need to move to stimulate the economy.
With both the RBNZ and the US Fed set to cut rates over the next 12 months, it can be difficult to tell what the impact will be on the kiwi dollar. Many commentators have labelled the RBNZ rate cuts as a key reason for the lower New Zealand dollar. However, from January 2019 – June 2020, it is anticipated that the US Fed will cut rates by 1.00% whilst the RBNZ will cut rates by 0.75%. If this plays out, it means the NZD will maintain a relatively higher yield than the US dollar – and in theory this should support the NZD/USD over the next 12-months.
Whilst interest rate differentials are pointing towards a supported NZD/USD – global markets are continuing to show signs of underlying weakness. On a global scale, inflation is almost non-existent, and economic growth isn’t much better.
So, two key things are happening to send the kiwi lower. Firstly, global markets are nervous about growth. There are increasing reports of an impending global recession. The New Zealand dollar does not do well in times of global uncertainty. After all – if New Zealand was a State in the USA, our population would only just put us in the top 25. With half of the US states having larger economies than New Zealand, it is fair to say we are tiny in the global scheme of things. And we are geographically isolated.
Furthermore, the kiwi is suffering from our reliance on China and Australia. Political tensions between China and New Zealand are bubbling away. This is further compounded by the trade war between the US and China. All in all – the kiwi economic picture is not looking entirely rosy. The trade tensions with China are one of Trump’s largest political footballs and he will inevitably continue to play the game up until the 2020 elections.
Don’t forget to keep one eye on the RBA this week, who are releasing their most recent meeting minutes, along with a speech from Governor Lowe. These events will no doubt echo the themes talked about here.
There will also be rate decisions from the Bank of Japan and the Bank of England – both worth looking at to gauge the sentiment in global markets.
It is always good for an economy to have economic growth rising faster than prices are rising – and this continues to be the case for the last eight years. However, NZ GDP has been heading lower and this is a key reason for a dovish stance from the RBNZ. Watch out for Thursday’s NZ GDP numbers as a precursor to the following Wednesday’s OCR Decision.
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