By Phil Lynch
Pressure remains on the New Zealand dollar as risk-off sentiment takes hold in global markets. The risk aversion is being driven first and foremost by the uncertainty surrounding the spread of the coronavirus. Jacinda Ardern has last night announced a ban on travellers from China that will last for two weeks – a decision that will be reviewed every 48 hours as the situation evolves.
The primary driver of the NZD weakness is the classic ‘flight to safety’. In times of uncertainty, commodity driven currencies are sold off heavily in favour of long-term safe-haven currencies like the US Dollar, Japanese Yen and Swiss Franc. This acts a bit like an insurance policy – and in this case is insuring against the threat of the coronavirus having a sustained long-term impact on global economic growth. This also means that the kiwi is likely to rebound rapidly if (and when) the coronavirus is brought under control.
That said, there is also the very real economic impact. Bernard Hickey sums up how the travel ban will affect our Tourism and Education industries. But this could just scratch the surface of the potential impact. China is New Zealand’s largest two-way trading partner, with a total of $32.7 billion of trade in 2019, making up 19% of New Zealand’s entire international trade. There is no question that New Zealand is uniquely exposed to this outbreak.
In Other News – Brexit
Britain has finally left the European Union, and the Union Jack has been lowered in Brussels parliament. A transition period gives negotiators until the end of 2020 to come up with a new trade deal, and there is of course the potential for this negotiation period to be extended. For now – the practical impact of Britain leaving the EU is notably subdued.
In Other News – Trump
President Trump looks like he has dodged another bullet, as the U.S. Senate have rejected witnesses in the impeachment trial. It is now almost certain that he will be acquitted this week. The entire process has attracted only minor interest from markets, and already attention is turning to who will become the democratic candidate for the 2020 election.
The Week Ahead
This week brings events that will inevitably take a back seat to developments with the coronavirus, but are still key events for financial markets.
The NZD – What to Expect
Already in 2020, the New Zealand dollar has shown itself as a currency that will punch above its weight. The recent downturn is understandable given the uncertainty surrounding the coronavirus. However, as soon progress is made in the fight against the deadly disease, I expect the NZD will make a swift recovery.
I expect to see the NZD stay supported in the fight against the coronavirus, and the outlook is shifting from key New Zealand banks too. On 24 January, the ANZ removed their call for a rate cut from the OCR in May. Last week, Westpac told markets the RBNZ may shift to a neutral OCR as early as it’s 12 February OCR Decision and Monetary Policy Statement. A shift too a neutral sentiment would mark a huge transition for the RBNZ – and this may come as early as Wednesday, 12 February.
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