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The Week Ahead in FX Markets – RBNZ & Midterm Elections in Focus

Published November 5, 2018

By Phil Lynch

The week ahead brings potentially volatile conditions for the New Zealand dollar, with plenty of action from both New Zealand and from the US. The key events to watch for this week are GDT Dairy Auction results, our Household Labour Force Survey numbers (Unemployment Rate), and the RBNZ’s OCR decision and MPS publishing. To add fuel to this fire we also have the US midterm elections to consider. Before we get into that, a quick recap.

The Kiwi in 2018

The NZDUSD spent most of the first half of 2018 sitting pretty, spending most of the first 6-months trading above 0.7000 cents – it felt ‘normal’ for the kiwi to be trading above 0.7000 and then very abnormal when it started to fall.

But it did fall – and sharply. Mostly on the back of US dollar strength. This strength came in the form of rising US central bank and real interest rates. The kiwi was also hurt by falling business confidence and a more dovish sounding RBNZ. US politics kept everyone on their toes, with trade wars hurting global risk sentiment, and therefore the kiwi. And of course, there was the US economic strength – which was reinforced on Friday with the US Labour Report showing 250k New Jobs were added to the economy, with the Unemployment Rate holding near 50-year lows at 3.7%, and with Average Earnings rising by 3.1%.

The Kiwi This Week

This week is filled with events that address nearly all the key themes for 2018 in a big way, making this one of the most important weeks for the kiwi this year. This includes:

  • US Federal Reserve Rate Decision
  • NZ Unemployment Rate, New Jobs, and Average Earnings
  • NZ RBNZ OCR Decision and MPS
  • US Midterm Elections

I break down the potential impact of each.

US Federal Reserve Rate Decision

Typically, this event trumps all others as the ‘main event’ for FX markets. This week, however, it is further down the list. Markets have priced in a 92% chance of rates being left on hold, which is about as good as it gets this far out. So, it’s fairly safe to say there won’t be any changes here, but it is still an event worth noting given there is an 80%+ chance of a hike when the Fed meet again in December.

Household Labour Force Survey

The RBNZ have cited that they need to improve the quality of this data given their new target of sustainable employment, however, that doesn’t stop this market event from impacting the kiwi. This week markets are expecting the Unemployment Rate to stay on hold at 4.5%, with wages rising by 1.9% annually. Given the low Business Confidence numbers last week, 4.5% would be a very strong outcome.

RBNZ OCR & MPS

The RBNZ will keep rates on hold at 1.75% this week. Yet this event is highly anticipated due to the nature of the RBNZ’s stance. The RBNZ Governor has stated that the next move in the OCR is equally balanced and could be up or down. Markets, as a whole, have taken this as a dovish sentiment.

Yet there are plenty of market participants (myself included), that believe the RBNZ’s next move is still going to be a hike. In my humble opinion, Governor Orr has merely stated the obvious when he said the next move could be up or down. With such a neutral outlook for so long into the future, and with the possibility of so many changes globally before the next move, it is anyone’s guess what the RBNZ might have to do. But I still expect the NZ economy to perform well enough over the coming 18-months to see a rate hike at some stage in 2020. It seems crazy talking about such distant changes – but the dovish sentiment has weighed heavily on the kiwi, and my view is that the sentiment is unjustified.

It is worth noting that the RBNZ are upgrading their MPS from this week, to include more of the statistical analysis they undertake. This may provide the market with more clues on how to interpret the Governor’s vague long-term outlook.

The Main Event: US Midterm Elections

These elections are possibly the main event for 2018. Whilst President Trump’s Presidency is not being voted on, the entire election is akin to a referendum on his Presidency.

Up for grabs are the House of Representatives and the Senate, where Republicans currently hold a majority in each. Current thinking is that the Republicans will hold onto the Senate, but that Democrats will win the House of Representatives. So, what’s the big deal?

If President Trump loses control of the House, Trump will still have some power through Executive Orders, which are still likely to be used on trade matters. However, it is widely expected that the Democrats will block Trump on nearly everything he tries to put forward on the domestic agenda. From scrapping Obamacare to running up massive debts (and raising the debt ceiling). There are also some who believe that a Democrat-controlled Congress could initiate impeachment proceedings against Trump.

So, what are the chances of the Democrats taking control? Well – in 2010 Barack Obama had an approval rating of 46%, compared to Trump’s 44% currently. Of the 435 seats, Obama went on to lose 63. In these Midterms, the Democrats need to win back just 23 seats. Currently, pollsters estimate an 80% chance of the Democrats gaining a majority.

Bringing it back to currency. This potential outcome has already hurt the US dollar, with the kiwi climbing last week. Should the Democrats win the House, then it will likely be US dollar negative. It will also add enough uncertainty to unsettle markets and heighten risk and volatility. We could be in for a rocky road this week.

Australia

Finally, it is worth paying attention to the RBA Rate Decision on Tuesday afternoon, especially if you’re exposed to the Aussie dollar. The RBA has taken a similarly neutral stance as the RBNZ amidst similar economic conditions. Yet they have maintained that the next move will be a hike, rather than opening the door for a cut. We can expect rates to stay on hold at 1.50%, but markets will be watching for clues as to the timing of the next rate hike.