The landscape has changed considerably for the New Zealand dollar over the past week, and the kiwi opens this morning just shy of two-month highs against the greenback. As per usual, it was not the kiwi that was the proponent of the recent move, but the US dollar – which weakened considerably in light of the US Federal Reserve all but ruling out any rate hikes for 2019.
The change in tone from the US Federal Reserve came as somewhat of a surprise to markets but is still a very notable event for participants in the NZD/USD. At 0.6900 cents (or close to it), the kiwi has found itself sitting smack bang in the middle of the 2018 trading range – and seeking direction for its next move. The change in stance from the US Federal Reserve may just tip the balance from a bearish outlook on the NZD to a bullish outlook. So, what exactly happened?
Whilst it was widely expected that the Fed would pull back on their hawkish rhetoric, the scale of the pullback was not anticipated, and this was enough to send the NZD barrelling higher against the USD. As recently as December, the Fed raised rates. At the end of Q3 last year, the Fed’s published dot plot (showing anticipated rate movements) showed that most Fed policymakers saw the Fed Funds Target Rate rising to somewhere between 3.00 and 4.00% across 2019. Now – those expectations are for the central bank’s rate to stay firmly below 3.0%. The Fed has reaffirmed that they are nervous about US and global growth – and don’t want to risk that further by raising rates too quickly.
So why has the Fed pulled back? Fed Chair Jerome Powell sums it up as follows:
“We are now facing a somewhat contradictory picture of generally strong U.S. macroeconomic performance alongside growing evidence of cross-currents. Common sense risk management suggests patiently waiting greater clarity”Fed Chair Jerome Powell
There are genuine concerns for Powell over these “cross-currents”, with global economic output facing a downturn. China and emerging markets have suffered lately, and trade wars have not helped. Perhaps the final nail in the coffin was the US partial Government shutdown. This is now likely to be a continuing stance for 2019.
We know that the annual average range for the NZD/USD over the past 20 years is 20%. Currently, implied volatility on the NZD/USD is 9.4%. Together, these indicate a probable range somewhere between 0.6200 and 0.7600. My previously bearish opinion on the NZD/USD has been undermined by the recent move from the Fed – and I am now shifting to the bearish side of neutral. Like the Fed – I will be reacting to upcoming data.
This week sees two major events for the kiwi. The first of which is the GDT Dairy Auction, with results published on Thursday morning. The second, is the NZ Unemployment Rate. The Labour-led Government of New Zealand has been parading the record low 3.9% Unemployment Rate – but this is expected to tick a little higher this week, with most analysts expecting this to rise to a still very respectable 4.2%. It’s unlikely this will have too much of an impact on the kiwi.
US data continues to be disrupted following the US Government shutdown, but we will get a look this week at the US ISM Non-manufacturing PMI – painting a picture of how the services sector is going in the US. With a light week of data, this may be a week of consolidation for the NZD/USD. Unless, of course, there are unexpected political curveballs – which have come to be expected these days.
This week we get two major announcements from central banks. The first is tomorrow afternoons RBA Cash Rate decision, where the central bank is expected to keep rates on hold at 1.50%. Questions remain how long the RBA can maintain these record low interest rates – but for now, we are unlikely to get any real answers. Nonetheless, this announcement does carry some event risk and we may see both the AUD/USD and NZD/AUD react accordingly. Not to mention this follows Australia’s Retail Sales data released earlier in the day.
Later this week, the Bank of England meet to decide on their own rates, which are currently set at 0.75%. The reasonably low rate setting will inevitably be continued, as Theresa May struggles to progress Brexit negotiations in Brussels.
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