2019 has proven to be a rollercoaster ride for the New Zealand dollar, with the kiwi climbing 1.9% over the last week. The move higher was down to a series of key events, but it is worth noting it all began from a low starting point. Traders and speculators had heavily sold off the kiwi dollar, following marginally weaker than expected employment numbers and a more dovish RBA. This dovishness, however, did not feed into the RBNZ’s view last week and they continued with their neutral and long-term outlook for local interest rates.
The USD dollar was also hit last week (allowing the kiwi to move higher), on the back of weaker US Retail Sales data on Friday morning, and comments from San Francisco Federal Reserve President Mary Daly. Daly surmised the FOMC won’t need to raise rates in 2019 – adding further confidence that the Fed will remain on hold this year.
The last two weeks have seen the NZD/USD fall by 2.4%, followed by a rise of 1.9%. This intraweek volatility has made it difficult to gauge an actual direction for the NZD/USD, and the resulting annual trade range has remained surprisingly stable. 89% of trading days over the last three months, have seen the NZD/USD open in either the 0.67’s or 0.68’s.
As always, EncoreFX advocate for a well thought through plan when managing your foreign exchange risk, and this typically includes maintaining a baseline level of foreign exchange cover when hedging strategically. If you haven’t yet formalised your plan – we can assist.
For discretionary components of your FX hedging plans, recent trading patterns provide a useful gauge for short-term tactics.
If you adopt strategic hedging as your main approach (filling up baseline level of cover for your ongoing requirements), then both importers and exporters should be nicely hedged to their minimum policy levels and beyond.
If you don’t have time to watch exchange rates around the clock, then you leave market orders with your dealing team, and we will watch these levels around the clock and capture the rate as soon as it reaches your desired target level.
For longer-term tactics, there are no prizes for guessing the importers are targeting 0.70 cents plus. Exporters, on the other hand, are targeting south of 0.66 cents. The tricky part is gauging the next directional shift for the kiwi. We know the kiwi moves a long way each year. The chart below shows how far the NZD/USD moved each year over the past 20 years.
With such a neutral outlook locally, any major shift will come from offshore events – and there are some key events in the mix. These include:
Trade Wars – President Trump has recently hinted that there will be an extension to the 1 March deadline for additional tariffs. Trump is increasingly desperate for a win – and ongoing trade wars could unsettle global growth and the stock market. It is difficult to predict the outcome, but we know that trade wars had a major impact on both market confidence and the US dollar in 2018 – the outcome here will be key to setting the direction for the kiwi.
Brexit – Two of Wall Street’s biggest banks have been pricing in more neutral outcomes for Brexit, with Goldman Sachs now stating there is a 50% probability that May will get a deal, and JP Morgan saying it expects May to get an extension to the March 29 deadline. Yet there is also a high possibility of a catastrophic outcome – where Britain leave the EU with no deal. This would have a seriously negative impact on global markets, and the kiwi does not tend to do too well in times of such uncertainty.
Outside of trade tensions and Brexit developments, markets will be focusing on central bank releases from around the world. First up is the release of the RBA’s meeting minutes tomorrow afternoon, and this is followed later in the week with Governor Lowe’s testimony to parliament.
The US FOMC minutes are also released on Thursday, and these will provide markets further insights on to just how neutral the US Federal Reserve has turned.
It will be a big week for the Aussie Dollar. The AUD/USD still trades near its lowest levels since the GFC. This week we’ll find out just how dovish the RBA has turned when their most recent meeting minutes are released. This is followed with important Wage Price Index data on Wednesday, and the Unemployment Rate on Thursday.
The NZD/AUD is pushing new long-term highs (~0.96), and importers are filling their boots with discretionary foreign exchange cover, whilst exporters continue to sit on the sidelines. The data released this week will guide markets on just how well justified the NZD/AUD at these levels is – with most market participants struggling to see this level maintained.
© Copyright - EncoreFX, 2018.The information in this post is provided for general information purposes only and has been prepared without taking into account any person’s objectives, financial situation or needs and, accordingly, it does not constitute personalised financial advice under the Financial Advisers Act 2008, nor does it constitute advice of a legal, tax, accounting or other nature to any person. Before acquiring any financial services or products from EncoreFX, you should consider the appropriateness of the information having regard to your own objectives, financial situation or needs. We recommend that investors seek advice from their usual adviser before taking any action. EncoreFX (NZ) Ltd is a registered Financial Services Provider (FSP 461386), and is a licensed derivatives issuer under the Financial Markets Conduct Act 2013. EncoreFX (NZ) Ltd has lodged a Product Disclosure Statement (PDS) for each of our derivatives with the Registrar on 21-Dec-2016. A copy of each PDS is available from us or from the Registrar at www.business.govt.nz/disclose.