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Focus on RBA and RBNZ cash rate announcements

Australia

Friday’s Building Approvals disappointed, to be fair it was only going to go one way with approvals falling 0.6% in March. The release pulled the Australian Dollar lower to a four month low of 0.6985 against the greenback. US (NFP) Nonfarm Payroll came in higher than markets were expecting at 263k and 3.6% unemployment a 49 year low, with the Aussie traded back to 0.7030 at the weekly close. US trade talks have again reared its ugly head with tariffs to be raised this Friday from 10% to 25% on Chinese made products entering the US. Talks between the US and China were supposed to take place this Wednesday but China are considering cancelling talks after recent Trump threats. In a fresh wave of downside momentum the Aussie is battling to stay over the pivotal 0.7000 level and looks extremely vulnerable ahead of tomorrow’s Retail Sales and RBA cash rate announcement which could go either way – down or remain unchanged at 1.50%

New Zealand

On the surface things looked rosy with NZ unemployment nudging lower to 4.2%, however the size of the workforce shrank 0.5% raising further questions as to whether the RBNZ will lower the cash rate this Wednesday. Chances range around the 50% probability for a cut at the meeting. We think the RBNZ will hold for a while yet possibly through to the August meeting. Quarterly inflation expectations print first today at 3pm NZT and are expected to remain at 2.0%. In the past the RBNZ have spoken about the downside risks to the NZ economy due to the decreased global outlook, but the threat of such a view for global growth seems to have been overstated. Although with renewed US China trade discussions taking a turn for the worst with the 10% tariff increase to 25% this Friday, this could sway RBNZ opinion. We have said a few times how we think Trump is sugar coating the true picture- expect things on the trade front to become considerably worse before anything improves. The kiwi is trading around the 0.6600 level against the greenback- if rates are cut we should see a retest of the yearly low of 0.6580. Read more

FX Update

ANZ Business confidence published slightly weaker adding a touch of downside vulnerability to the NZD Tuesday. Chinese Manufacturing data released at the same time down on market expectations which dragged risk currencies lower. The kiwi fell 30 points before recovering somewhat on Wednesday’s employment numbers. On the surface things looked good with unemployment nudging lower to 4.2% however the size of the workforce shrank 0.5% and raising questions as to whether the RBNZ will now lower the cash rate next week on the 8th of May. Chances range around the 50% probability for a cut at this meeting. We think the RBZN will hold for a while yet and then cut around August.

The Federal Reserve left their benchmark rate unchanged at 2.5% Thursday morning strengthening the Big Dollar as the WSJ Index which measures the strength of the US currency against a basket of 16 currencies advanced to 90.72. This is the highest level since November 2018. The Fed noted some important indicators had shifted lower over the first quarter of 2018 and that soft inflation was likely to be “transient” – he would remain patient. ADP Non-Farm Employment figures, an early look at the Non-Farm Payroll release later tonight, came in higher than markets were expecting at 275k based on 181k, close to an additional 100k more showing an extremely robust US jobs market. Friday’s NFP could be overstated by census workers working under the US govt payroll in April and May.       Read more

FX

NZ Employment the local focus

Australia

Easter holiday week has not been kind to the Australian Dollar as it slid large in thin market trading. The worst performing currency, it has depreciated nearly 2.0% against the Japanese Yen. CPI q/q printed down at 0.0% on 0.2% expected, aggressively knocking the Australian currency lower momentarily under 0.7000 against the big dollar. The CPI number y/y is the worst result on record. The result has increased the odds of a rate cut at the 7 May RBA meeting. It’s a quiet week for Australian economic data with only Building Approvals Friday to get excited about.

New Zealand

Easter holidays made for a mixed week of trading for the New Zealand Dollar in thin market conditions. Trade Balance the only highlight published at 922M based on expectations of 131M from the month of March The numbers were higher than normal based on seasonally adjusted exports for dairy, meat and forestry products. The 922M surplus of exports is the highest since April 2011. ANZ Business confidence printed only slightly changed from prior this morning, but it was weak Chinese Manufacturing data which put pressure on the kiwi across most NZD crosses, the NZD/USD dropping 20 points following the release. NZ unemployment is expected to drop to 4.2% from 4.3% Thursday. Read more

The USD makes gains across the board

Australia
Australian markets were quiet on the reduced Easter/ANZAC holiday period with the main focus this week on the Q1 CPI data due out early this afternoon. News that the Chinese government was about to end stimulus measures for the economy saw pressure back on the Australian dollar which has slipped back from the 0.7200 level against the USD seen last week to below the 0.7150 level with next support seen down at the 0.7100 mark. We expect thin volumes over this week so any move may be exacerbated.

New Zealand
Continuing thin volumes and little local data will see the NZD moved by offshore markets this week, with only trade data on Friday to provide any local input. Already the news on reduced China stimulation has seen the NZD drift lower and we look for the kiwi to remain on the defensive over the week. Immediate support is at the 0.6600 level. Read more

NZ CPI Drops The Kiwi

Australia

The Australian Dollar consolidated around the 0.7160 area against the big dollar Tuesday off last week’s low of 0.7120 as the currency waited in limbo for the published release of the RBA monetary minutes from the latest cash rate announcement two weeks ago. The minutes highlighted the RBA board are unlikely to raise rates in the near term and a rate cut would be appropriate if inflation stays low and unemployment trended higher. The RBA would support the economy via a lower valued Australian Dollar. The AUD fall in value 20-30 points across the board on the release. Later in the week jobs data represents the only excitement on the calendar and should offer us further direction in the currency. We are expecting more of the same from February’s 8 year low in unemployment and RBA’s view of strong growth through 2019.

New Zealand

Putting aside bad news this week in the markets last Friday’s positive risk sentiment should continue deep into this week. Good Friday holiday and Easter Monday will make sure investors ease into the weekend as market volume thins out. Chinese March Trade Balance released at a huge 221 Billion after 2 Billion markets were expecting highlighting a rebound in February and a nice healthy surplus. The kiwi spiked to 0.6780 against the greenback outperforming on the Monday but eased back to 0.6750 as equities dropped a touch. CPI came in low at 0.1% after we were expecting 0.3% putting immediate pressure on the kiwi gapping it 100 points lower. Read more

FX Update

Overview 

Investors became nervous midweek after the US Fed’s March meeting minutes added vagueness regarding the direction of the next move in rates. Participants noted that the rate could shift up or down depending on upcoming economic data and other developments. US Core CPI printed a shade lighter than predicted at 0.1% from 0.2% expected putting pressure on the greenback. Earlier the IMF said the global economy was slowing and downgraded the global outlook for growth from 3.6% to 3.3% for 2019. Projections were positive growth prospects would improve in the second half of the year supported by shifts to central banks monetary policy

The EU have agreed to a Brexit extension to 31 October 2019 (6 months) as Theresa May continues to work on her 585 page withdraw agreement and a political declaration on the future of the UK. May will have extra pressure put on her between now and the exit date to stand down to allow a new party leader to enter the fray- I’m not sure this is the best solution with limited resources available. The main issue with an extension is until now government have been unable to agree on a way forward and make compromises. Fundamental disagreements between parties around what the relationship looks like between the EU and the UK have the capacity to derail yet a negotiated solution. Read more

International Trade

NZD the worst performing currency in April

Australia

All in all it was a solid week for the Australian Dollar closing just above its opening price around the 0.7100 area against the greenback.  The Reserve Bank of Australia left rates unchanged at 1.50% Tuesday but gave a cautious statement to the outlook to the Australian economy for the next while. Governor Lowe gave the impression he was preparing us for lower rates after growth nearly stalled over the second half of last year. The Aussie Dollar initially dropped to 0.7050 levels against the big dollar but by midday Wednesday was pushing 0.7100. The Australian budget lowered its GDP forecast for the current financial year to 2.25% down from 2.75%. Through to 2020/21 growth is expected to rebound to 2.75%. Retail Sales published much higher than the predicted number of 0.3% to 0.8% offering relief for the dovish RBA. May the 18th is looking the most likely date when federal elections will be held. The latest poll is suggesting current government is 47% support while the opposition is 53%. This week’s calendar is not as action packed as last week with Westpac Consumer Sentiment holding market interest.

New Zealand

Who turned up to work an hour early?
Leading into the market close the NZ Dollar was the weakest performer in the major group dropping to 0.6717 against the US Dollar post (NFP) Non-Farm Payroll release. It has struggled to gain any traction after increased chances that the RBNZ could cut their interest rate in the next (May) meeting weighing the kiwi down. This week’s bias will be to the downside with a lack of local economic data price will be vulnerable to offshore shifts in sentiment. US Non-Farm Payroll for March printed up on expectations of 172,000 at 196,000 showing an improvement from the poor February numbers, while average earnings growth came in lower at 3.20% y/y from 3.40%. Unemployment remains the same at 3.80% with notable gains in healthcare and professional services. Read more

Market Overview

The Reserve Bank of Australia left rates unchanged at 1.50% Tuesday but gave a cautious statement to the outlook to the Australian economy for the next while. Governor Lowe gave the impression he was preparing us for lower rates after growth nearly stalled over the second half of last year. The Aussie Dollar initially dropped to 0.7050 levels against the big dollar but by midday Wednesday was pushing 0.7100. The Australian budget lowered its GDP forecast for the current financial year to 2.25% down from 2.75%. Through to 2020/21 growth is expected to rebound to 2.75%. Retail Sales published much higher than the predicted number of 0.3% to 0.8% offering relief for a dovish RBA.

US ADP Non-Farm Employment released weaker at 129,000 based on 184,000 expected for March and is usually a good gauge on what we can expect for (NFP) Non-Farm Payroll figures when they are released Saturday morning. That being said we can expect NFP to be around 175,000, anything less than this will sink the USD and push the NZD and AUD north as it did last month when the print was also weaker than expected. Earlier in the week US Retail Sales printed poor at -0.2% from 0.3% expected showing signs that the economy has shifted gears.

It’s been a quiet week on the economic docket in NZ with just business confidence printing down on expectations highlighting falling business confidence for the March quarter. The kiwi has been under pressure-easily the weakest currency this week. The global dairy auction was the 9th consecutive rise for the index with overall prices slightly up 0.8% with skim milk prices up 1.8% but whole milk surprisingly slipping down 1.3%. The NZ Minimum wage for adults rose from $16.50 per hour to 17.70 per hour on the 1st of April and is the biggest single increase ever. More than 200,000 are affected by the welcome rise but some say job losses could be the by-product of an unsustainable increase. With the government forecasting to have the minimum wage at $20 by 2021. Expect the consumer price index (CPI) to go up as a fair chunk of products and services will need to increase prices to accommodate. Read more

Signs of progress in US/China trade deal

Australia

Twas a quiet week on the docket for Australian economic releases. The Aussie remained robust outperforming all major currencies only dropping in value against the Canadian Dollar.  Job vacancies for the 3 months to February showed solid demand, with banks supporting the view that employment will continue to improve and provide a balance for weakening housing numbers this year and running into 2020. This week’s RBA cash rate announcement and statement will be the main event with mixed opinion as to whether the RBA governor Lowe will offer up a more dovish slant than his previous comments suggest. With economic outlook looking soft the RBA are already concerned about weakening 2019 growth lowering the GDP forecast from 2.0% to 1.50%. We suggest the RBA could hint at cutting rates earlier than the November expectation markets are predicting. Friday we have Retail Sales.

New Zealand

Adrian Orr left rates unchanged at 1.75% mid last week as markets were expecting but hinted at softer domestic growth and global worries increasing potential for a rate cut towards the end of this year, some say earlier. The general feel is that drops could start as early as May with 3 cuts in total to next February. We have been at historical lows since September 2016- the average cash rate over the past 34 years going back to 1985 is 7.36%. So early 2020 we could well be looking at the overnight rate at 1.0% which would be quite an incredible outcome. The NZ Minimum wage for adults rose from $16.50 per hour to 17.70 per hour yesterday and is the biggest single increase ever. More than 200,000 are affected by the welcome rise but some say job losses could be the by-product of an unsustainable increase. With the government forecasting to have the minimum wage at $20 by 2021 expect the consumer price index (CPI) to go up as some products and services will need to increase prices. With a weakening economy this will no doubt put a strain on small-medium businesses. Read more

FX Update

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The RBNZ shifted its neutral stance on policy to dovish Wednesday, signalling the next move in cash rates would be down. Adrian Orr left rates unchanged at 1.75% as markets were widely expecting but hinted at softer domestic growth and global worries increasing potential for a rate cut towards the end of this year.

ANZ are forecasting drops starting in August then November and again next February. At this stage this seems a fairly extreme view as we have been at a historical low since September 2016- the average cash rate over the past 34 years going back to 1985 is 7.36%. The New Zealand Dollar slipped a whole cent to 0.6805 against the greenback on the release and has remained under pressure across the board ever since. Part of the issue for Orr is the global central banks dovish stances were putting increased upside pressure on the New Zealand Dollar which he is trying to avoid for export reasons. Read more