By Phil Lynch
The United States and China have agreed upon ‘Phase One’ of a trade deal over the weekend, and risk sensitive currencies such as the New Zealand dollar have been buoyed as a result. The news comes as markets face a barrage of tier one economic announcements, including our own CPI data on Wednesday morning at 10:45 AM.
The emerging deal includes agriculture, currency, and some aspects of intellectual property, and has resulted in the U.S. suspending a threatened tariff hike. President Trump has referred to the developments as a ‘lovefest’, whereas Chinese representative Vice Premier Liu He was more reserved, stating, “we will continue to make efforts”.
Notably, there was still “more work to do”, according to U.S. Treasury Secretary Steven Mnuchin, who added “we will not sign an agreement unless we get and can tell the president that this is on paper”.
Overall markets were upbeat about the news, with the Dow Jones climbing 1.2%. This ‘risk-on’ tone struck, allowed the NZD to post further gains – settling into the low 0.63’s against the greenback to start the week.
The highlight in a barrage of economic releases this week, is our own inflation numbers, due out at 10:45 AM on Wednesday morning. Markets are expecting the Q3 numbers to show a quarterly rise of 0.6%, and an annual rise of 1.4%. Tradeable inflation (or ‘imported’ inflation) is expected to be even softer.
In the RBNZ’s latest Monetary Policy Statement from August, their forecasts showed that Q3 Inflation would be at 0.5% (QoQ) and 1.3% (YoY). So, the markets current expectations are for inflation to come in stronger than the RBNZ’s forecasts. This is in part thanks to a lower New Zealand dollar, which on a trade weighted basis sits 4.2% lower than the RBNZ forecasted, with TWI at 70.32, vs the RBNZ’s forecast of 73.40.
The big question is – if inflation comes in above the RBNZ’s forecast, what should the central bank do with the OCR when they decide on 13 November? Last week, markets had fully priced in a rate cut in November, as well as one more by the end of 2020. Today, that confidence has slipped ever so slightly, with markets now pricing in a 94% chance of a rate cut in November. A higher inflation number on Wednesday could shake this confidence further. In this scenario, we can expect the NZD to benefit substantially.
Other than New Zealand’s own inflation, there are several key economic releases to look out for. The highlights include:
The British and EU negotiations are continuing, and somewhat astoundingly, have produced a degree of confidence that a deal may still be struck before the 31 October deadline. Chief negotiators for both the EU and Britain labelled the Friday talks as “constructive”. There is still an enormous amount of work to be done – but the confidence has given the GBP a huge boost – with the NZD/GBP now trading at 12-month lows.
This week is critical for Brexit, with negotiations taking place with all 28 national leaders in Brussels. If by Saturday (UK time) no deal is reached, Prime Minister Johnson will ask for an extension, as he is required to do by law. Johnson has said he would rather be “dead in a ditch” than seek any further extension, but the UK Government have acknowledged the need to request an extension.
Considerable uncertainty remains, and large swings in the value of the NZD/GBP exchange rate should be anticipated over the coming weeks. Given the heightened risk, both importers and exporters should be considering unhedged positions.
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