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The Week Ahead in FX Markets – RBNZ to Hold Rates at 1.00% | Coronavirus Weighs Heavy

Published February 10, 2020

By Phil Lynch

The flight to safety was extended over the weekend, and the kiwi dollar has suffered significant losses as a result. The NZD opens down 0.9% against the greenback this morning, and 1.2% against the Japanese yen. It wasn’t just the kiwi that was hurting – with the AUD/USD also falling 0.9% taking it to its lowest level in more than a decade.

U.S. Non-farm Payrolls data added further pressure on the NZD and AUD, with the headline number of new jobs coming in at 225k, vs expectations of 160k, and Annual Earnings climbing at a rate of 3.1% vs expectations of 3.0%.

The downward pressure looks set to remain, with the novel coronavirus extending its grip on markets. So far there has been:

  • 37,553 cases reported globally
  • 813 deaths (2.2%)
  • 2,394 recoveries (6.4%)

The number of deaths now exceeds the SARS virus, and some are officially calling the virus a pandemic. It is more challenging than previous outbreaks because symptoms take longer to develop than other viruses.

It is still unclear how quickly a vaccine can be developed and tested, but some estimates have indicated this could take up to one year. This week, many Chinese businesses are sending their employees back to work after the Lunar new year, and there are concerns this may increase the spread of the virus.

China has committed USD 10.26 billion to fight the virus, and the PBOC has indicated it will step up policy support.

The economic impact is as yet very difficult to gauge, but economists are already predicting the virus could wipe as much as 0.3% off the global economy.

 

 

The Week Ahead

Central Bank Speeches

This week we’re likely to hear more about what central banks are thinking regarding the coronavirus, and any action that will be taken. There are speeches scheduled from chief of each the ECB, the BoE, the RBNZ, the RBA and the U.S. Fed – so there will be plenty to keep markets busy this week.

One of the underlying themes in 2020 is the lack of scope that central banks have available to add stimulus to their economies. Most central banks around the world are already maintaining highly accommodative policy settings and have little or no room to lower rates any further. Markets will be looking for clues as to what type of steps could be taken from here.

RBNZ OCR & MPS

The main event this week will be our own central bank’s Official Cash Rate decision, and Monetary Policy Statement. The bank is widely expected to keep rates on hold at 1.00%, with markets pricing in just a 7% chance of rate cut. This is a far less dovish outlook than was adopted in Q4 2019, when markets had at one point fully priced in a 0.25% cut from Governor Orr – so theoretically means the NZD should be well supported.

But the RBNZ has a tricky task on Wednesday, where they are balancing the uncertainty of the coronavirus outbreak with the recently solid economic output. For now, it is safest to assume they will maintain their slightly dovish outlook and will continue to reference global conditions as the main cause for concern.

U.S. Inflation

Later this week, markets will take a close look at U.S. Consumer Price Index figures. Markets are expecting a reasonably high 2.5%, which would be supportive of current policy settings the Federal Reserve are running and the neutral outlook that markets are expecting.

Outlook for the New Zealand Dollar

The kiwi dollar has found itself (once again) at unexpectedly low levels against most of our major trading partners, and this is predominantly down to the uncertainty surrounding the coronavirus. In just 28 trading days of 2020, the NZD/USD has fallen 4.9%.

There is no question that the outlook for the kiwi is tied directly to the uncertainty surrounding the coronavirus, and the bleak outlook on the virus will likely keep the kiwi under pressure for some time yet.

But there is hope. The kiwi has shed 4.9% mostly due to the global economic uncertainty that has been caused by the outbreak. Yet this is most certainly a global issue, meaning that the New Zealand economy is not the only one that will be impacted by the outbreak – and a 4.9% dip in our exchange rate is unwarranted.

There is also a strong possibility that more upbeat developments are announced over the coming weeks. This could be in the form of firmed up details on how the virus is spread, or what exactly the incubation period is, or maybe even progress towards a vaccination. In this scenario, the NZD will be well poised to unwind the losses made so far in 2020, and a 0.65 cent+ NZD/USD is very much attainable in that scenario.

 

 

 

Rees Logan, Adam Nikitins and Stewart McCallum were appointed Joint and Several Voluntary Administrators of EncoreFX (NZ) Limited on 30 March 2020. Adam Nikitins and Stewart McCallum were appointed Joint and Several Voluntary Administrators of EncoreFX (Australia) Pty Ltd on 30 March 2020. Any queries regarding the Administrations should be directed to restructuring@nz.ey.com.