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The Week Ahead in FX Markets – Kiwi off boil; Central bank shifts; NZ GDP

Published June 18, 2018

By Phil Lynch

The kiwi opens the week off the boil, after a tumultuous week of political events, economic releases, and central bank positioning. A quick recap of last week seems appropriate given just how busy markets were.

  • President Trump / Chairman Kim meeting turned out to be a non-event for markets, with nothing out of the ordinary occurring (perhaps we should’ve seen that coming).
  • Fed Chair Powell delivered a more hawkish outlook, raising rates once and signalling two further rate hikes in 2018 (though there is still some uncertainty on two hikes so data will be important over the coming months). The NZDUSD lost ground and remains under pressure because of this.
  • ECB Chair Draghi delivered a more dovish outlook, extending its bond-buying program to December 2018 and putting the talk of rate hikes on the back burners until well into 2019.
  • Trade wars were reignited as the weeks hot topic with retaliatory tariffs being applied to the U.S.

The two central bank shifts were significant for markets and will be a key driver of demand over the mid to long-term. Yet as we all know there are several other drivers of currency value. Whilst I often discuss the overwhelming nature of interest rates in markets, below I have listed some of the common factors that drive currency value over different time periods:

No matter how much time you spend studying a single category, there will always be moving parts in other categories. Picking the currency is a bit like a kiwi winning the Football World Cup $5million TAB competition. The chances of winning are about one in 4,350,000,000,000,000,000,000,000,000,000, or one in 4 thousand, 350 billion billion billion. For short – one in 4.35 nonillion.

Few thought that Argentina would draw their opening match against Iceland – a country with a population of about 350 thousand people. Or that competition favourites Germany would lose to Mexico.

Therefore, we continually emphasise the importance of following a risk management process – we don’t want you to put your house on Argentina or Germany to win their opening games.

Week Ahead

New Zealand

This week is decidedly more local than last. The first important kiwi event will be the GDT Dairy Auctions on Wednesday morning. It is strong demand from China and over-performing commodity prices that have led banks like UBS to call for the NZDUSD to be at 0.75 by the end of 2018 and 0.78 by the end of 2019.

If you believe UBS’s forecasts, then it is worth ensuring that your hedge ratios are appropriate. It also worth considering hedging instruments that offer participation – more on hedging instruments here.

Also ahead this week is New Zealand’s Current Account Deficit and Gross Domestic Product. There is some concern amidst markets that our GDP numbers from Q1 may show signs of a slowdown, due to weather-related incidents. This will be one to watch this Thursday.

Global Events

Close to home sees the release of the RBA Meeting Minutes tomorrow afternoon. The Aussie has been on a slippery slope lately, with the AUDUSD falling from a peak of 0.7676 in early June to 0.7438 this morning.

Worth watching is Japanese & Canadian Inflation numbers later this week. The week is rounded out with Canadian Retail Sales.

However, the main event this week is the Bank of England’s Rate Decision. Markets are expecting the central bank to keep rates on hold this time (at 0.50%), but are also expecting them to confirm if a rate hike is coming later this year. Last week two of the largest central banks shifted their stance – will we get another shift this week?

Global – Trade Wars

With fewer tier one economic data releases this week, markets will have time to adjust to the looming threat of trade wars. Trump’s former economic adviser Gary Cohn, has said trade wars could cost the U.S. economy $2 trillion – wiping out the Trump administration’s claimed tax-cut boost.