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Investors warmed by US-China talks and Brexit. Not so fast.

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Australian Dollar performance last week was patchy in a market driven by risk sentiment. Through Thursday we saw a risk off mood change into “risk on” with renewed optimism of a China/US trade deal being done, at least partially. Key elements seem to be China’s commitment to purchase more US agricultural products as well as a promise on intellectual property rights as well as currency policy changes. Further talks will take place later in the year in November, until then Trump has ceased all forecasts to increase tariffs from 25% to 30% which were set to take effect this week. Consumer sentiment in Australia is at the lowest levels since July 2015. The index has dropped over 8.0% since the RBA started cutting rates in June. This drop in particularly relevant with the RBA cutting 75 points since May 7th 2019 with expectations that rate cuts are supposed to boost confidence on a personal, business and economic levels but have not. This week we have monetary policy minutes from the 1 October rate cut to 0.75% which shouldn’t present anything new.  Later in the week attention turns to Aussie Employment data Thursday with the unemployment rate expected to stay unchanged at 5.3%

New Zealand

The New Zealand Dollar traded in reasonably tight ranges over the week into Thursday when risk sentiment deteriorated sending the NZD lower across the board. This didn’t last long as news hit the wires that the US and China had agreed to a partial trade deal. Risk into Friday’s close remained positive buoyed by the “phase one’ trade deal sending the NZD off lows to post fresh highs. Against the US Dollar the kiwi traded 0.5% higher to 0.6350. The same can’t be said versus the Pound with positive Brexit headlines the NZD/GBP cross depreciated to 0.4995 an October 2018 low. On the economic docket this week is quarterly CPI Wednesday the only focus locally, 0.6% is forecast for the third quarter the same reading as the second quarter figures. Read more

Economic Releases

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Below are the weekly economic releases for this week (NZT)

Monday 14/10

  • All Day, JPY, Bank Holiday

Tuesday 15/10

  • All Day, CAD, Bank Holiday
  • All Day, USD, Bank Holiday
  • 130pm, AUD, Monetary Policy Meeting Minutes
  • 930pm, GBP, BOE Gov Carney Speaks
  • 15h-16th, CNY, New Loans
    • Forecast 1350B
    • Previous 1210B

Wednesday 16/10

  • 1045am, NZD, CPI q/q
    • Forecast 0.60%
    • Previous 0.60%
  • 930pm, GBP, CPI y/y
    • Forecast 1.80%
    • Previous 1.70%

Read more

FX Update

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Risk tone in markets deteriorated Thursday under the strain of Brexit and US/China trade talks.

Currencies such as the kiwi and Aussie started to track lower as headlines around US trade negotiations with China in Washington lowered expectations that any significant deal would be made. Direct via Chinese media was news the Chinese delegation refuses to talk about technology transfers a key part of the negotiations for China. Higher level talks are only expected to last one day (Thursday) with the Chinese team leaving soon after. Dampening Chinese spirits ahead of the talks was the US blacklisting of 28 Chineae companies this week which upset Chinese officials. China were keen and willing to consider a partial deal based on them buying more agricultural products in return for the US to cancel some of the current tariffs in place. 

The Federal Reserve Minutes pointed to economic outlook risk management and inflation objectives. Trade tensions, geopolitics and the global economy weakening were the main points. Several policy makers suggested keeping rates steady saying forecast economic projections had not changed and would not affect ongoing expansion. Other members saw the opposite with further rate cuts needed to boost future expansion. The single best indicator of “recession” is an inverted yield curve. At the moment the short term rates cross (invert) the long term rates at around the 5 year maturity. This is particularly bad as the Fed increases short term rates this pushes the long term ones lower spooking investors. Every US recession since 1950 (all nine) have been preceded by an inversion in the yield curve. The most closely watched is the rates between the 2 year and 10 year.  Read more

FX Update

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Currency markets have continued to broadly fall lower this week off the back of weak data, trade tensions and general uncertainty around Brexit. 

The Trump administration, after winning a World Trade Organisation ruling (WTO), will press ahead with imposing tariffs on a range of imported products from the EU region. The list will be announced over the next day with the US expected to add 10% on EU aircraft and 25% on agricultural and other goods. The US government had lodged complaints of unfair Airbus subsidies as early back as 2004 over what they call illegal government subsidies by several European governments. The US has said the EU have no real basis for any retaliation with the two parties expected to meet for trade talks on October 14th. The new tariffs will take effect on October 18. Odds that we will see a further cut to the Federal Reserve official rate of 2.0% have increased after manufacturing figures continued to worsen in the month of September. The Purchasing Managers Index (PMI) dropped to the lowest level of 47.8 from August 49.1 since mid 2009. The news sent risk products lower including equity markets and commodities. Thursday mornings ADP US employment print was also below expectations devaluing the greenback. This puts particular importance on Friday’s Non-Farm Payroll release, if the ongoing weakness in the US economy spreads from manufacturing to employment and jobs are affected this could extend long term US and global economic woes creating further uncertainty. With 140,000 people expected to be added to the workforce over the September month anything and unemployment to remain stable at 3.7% anything less could indicate darker times to come. Read more

FX Update

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We should get plenty of movement this week in the Australian Dollar with a reasonably well booked economic docket. Building Approvals and Retail Sales will feature along with the main event, the Reserve Bank cash Rate and Monetary Policy Statement today at 5.30pm NZT. The RBA over the past fortnight would have been looking hard at the prospects of cutting today based on rather disappointing recent data highlighted by poor overall employment numbers. A cut is almost widely predicted with most Australian Banks bringing forward their cut forecasts, the NAB see a rate cut today and at the December meeting which would bring the benchmark rate down a historic 0.5%. CBA also have 25 point cut priced in for today. Rate cut rhetoric should keep spikes in the Aussie Dollar contained with continued easing bias dominating overall momentum to the downside.  

New Zealand

The New Zealand Dollar turned in the best weekly performance against its peers despite a choppy and mostly directionless market. Against the British Pound the kiwi was up over 2.0%. The Reserve Bank of New Zealand left the official cash rate unchanged at 1.0% but indicated that further cuts remain likely. Adrian Orr’s report was not as dovish as we were anticipating with the RBNZ expecting upcoming NZ data to firm up the need to hopefully not make a further cut. The Reserve Bank of New Zealand Annual report published Monday, Adrian Orr saying the New Zealand economy has been resilient through a period of weakening global growth and heightened global uncertainty. “Throughout the year our priorities focused on setting the foundations of significant change and setting us up for growth and innovation.” ANZ Business Confidence showed an 11-month low in September of -53.5 form the previous -52.0 and immediately put the NZD under pressure. Read more

FX Update

The Reserve Bank of New Zealand has left the official cash rate unchanged at 1.0% but indicated that further cuts remain likely. Domestic indicators and global uncertainty show the softness in the economy should continue into the second half of the year. The RBNZ sees further scope for more stimulus as the economy tries to maintain inflation and employment targets. So in summary by Orr a dovish report but not as dovish as we were predicting. GDP forecasts out to 2020 were positive by the RBNZ which was surprising. The chances of a rate cut at the 13 November policy meeting builds with Orr saying he expects upcoming NZ data to firm up the need to not make a further cut.  The New Zealand dollar and Australian Dollar traded lower after the release through Wednesday’s overnight trading sessions and into Thursday.

The President Trump impeachment news affected the risk currencies with 218 house members supporting the inquiry. With Trump’s members in the senate holding a Republican majority it is always going to be tough. The fact the democrats launched an impeachment inquiry based on no facts has damaged their credibility. Equity prices rallied off the back of the US President making comment he thought a trade deal with China would come sooner rather than later. This pushed the US dollar higher with the US leader confirming that China were already making big purchases of agriculture, pork and beef. Unfortunately it’s the intellectual property discussions which will change the game and fundamentally change global economies. Trump said “there’s a good chance we’ll make a deal with China, we are getting closer and closer”. It’s hard to believe based on previously made comments, but for now it has improved market sentiment.   Read more


RBNZ Update

The Reserve Bank of New Zealand has left the official cash rate unchanged at 1.0% but indicated that further cuts remain likely.
Domestic indicators and global uncertainty show the softness in the economy should continue into the second half of the year. The RBNZ sees further scope for more stimulus as the economy tries to maintain inflation and employment targets.
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NZDUSD recovers off a 4 year low

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The RBA must now be considering further rate cuts after last week’s poor employment results. Last week the currency underperformed coming off the back of a fortnight of gains devaluing 100 points against the greenback and losing 1.5% against the British Pound. Banks have been revising their interest rate forecasts with the NAB seeing a rate cut at both the October and December meeting which would bring the benchmark rate down to 0.5%. CBA also bought forward their predictions to a 25 point cut in October. Early last week the RBA minutes of the 3rd September monetary policy meeting said the bank would think about easing policy if it thought it was needed to support growth, saying we will see an extended period of low rates in efforts to achieve better employment and inflation targets. In the wake of last week’s Federal Reserve cutting rates by 25 points to 1.75% and trade war flows we could continue to see a risk averse currency environment sending the Aussie dollar deeper.

New Zealand

The New Zealand Dollar crosses continued to dive lower in a week dominated by risk sentiment. By far the weakest performer of the G10 currencies the kiwi traded to 0.6260 at the close against the greenback, a 1.8% decline on the week. The low represents an August 2015 level. President Trump Friday said he doesn’t think he needs to strike a trade deal with China prior to the 2020 US elections. He also confirmed he was not looking for a “partial” deal with the Chinese after saying last week he would consider this. Equities turned negative on Friday after a Chinese delegation cancelled a US farm visit confirming things have turned again shifting earlier sentiment from buoyant to pessimistic. This week’s direction will be set by Wednesday’s RBNZ monetary policy statement and ongoing risk sentiment shifts. Given Orr cut rates by 50 points at the last meeting on 7th August we are unlikely to see a further cut as the last cut will take time to penetrate into the NZ economy.

United States

A risk off tone dominated markets during the second half of the week, the US Dollar retreating off early week highs to trade down to 107.50 against the Japanese Yen. Sentiment flipped when Trump made comments he wasn’t interested to piece together a partial trade deal with China going back on his earlier comments suggesting otherwise. The Chinese negotiation delegation cancelled their trip to US agricultural states adding to market gloom.  The Federal Reserve lowered its overnight rate from 2.0% to 1.75% Thursday as most predicted with Powell offering up a tinge hawkish statement closely matching the one he gave in the July meeting. Seven Fed voting officials opted for a 0.25% cut while two voted no cut, and one wanted a cut of 50 points. This confirms differences of opinion with the current state of US geopolitical uncertainty and how it may hinge future policy. This week’s economic docket focuses on a number of Fed members speaking and Final quarterly GDP which is expected to print at 2.0% how lower than the March quarter of 3.1%.


The Euro travelled broadly sideways throughout most of last week, breaking down slightly against the greenback to 1.1000 but picking up new ground against the depleted NZD. The EUR has suffered renewed selling pressures since the ECB announced new QE stimulus, the first in two years. The week ahead promises a mix of internal and external related data influences. Testimony via ECB President Draghi in the EU parliament as well as Septembers flash Eurozone PMI surveys will set the tone on Monday. Draghi also speaks on Friday at the European Systemic Risk Board annual conference in Frankfurt.

United Kingdom

A no deal Brexit result is still a very real scenario based on the large disparity in the negotiation process between the UK and European Union. Irish Foreign Minister Simon Coverey said Friday there was a wide gap between the UK and EU as they wait for serious proposals from London town. The Irish backstop – a policy aimed at preventing the UK returning a hard border on Ireland has been the biggest hurdle to get over in the UK/EU talks to date. The Bank of England has held their overnight interest rate unchanged at 0.75% in a unanimous vote 0-9. With less than two months until the Brexit deadline, the UK gets set to leave the EU with a dark cloud of uncertainty hanging over the Bank of England. No economic data this week on the docket suggests the Pound will again get its leads from Brexit and risk related headlines.


The Bank of Japan (BoJ) retained their overnight cash rate at -0.1% and their 10 year yield target unchanged at 0%. Forward policy for future monetary targets was also unchanged with the central bank maintaining their opinion of the economy – the Bank saying they will keep rates low for an extended time at least through to June 2020. The Bank of Japan would not hesitate to ease if necessary and would review at the next meeting on October 31st. The decision on this seems to be a ploy to kick the can down the road for a while they figure out the best option. They don’t really have any preconceived ideas we know of on further easing. Not signalling to ease as most other central banks have done increases prospects of the Japanese Yen going higher across the board. Part of the BoJ’s objectives are to keep higher Yen values under wraps but this latest move is a little weird.


The Canadian Dollar has concluded a week of mixed results with the currency trading all over the park a by-product of earlier Crude Oil production setbacks. After Crude oil reached new highs around 62.50 prices seem to have stabilized somewhat around 58.00 but the situation in Saudi Arabia with the oil field attacks still seems a real threat to ongoing production with media reporting everything is tickety boo not being the case. It’s only going to take one oil outage somewhere to explode the oil price back through 60.00 again and send the CAD into orbit. Aramco vowed to keep the Abqaig oil production disruption to a minimum and restore things back to pre attack producing volumes but stories surfacing suggest a long drawn out repair is the more likely scenario with reports suggesting the end of 2019. It will take a week before serious reports are provided to the extent of the damage and the time frame involved before normal production can resume. In the meantime the Canadian Dollar hangs in the balance, especially in the NZDCAD pair with it trading at long term support levels currently. No significant data in Canada this week.

Major Announcements last week:

  • Bank of England retain cash rate at 0.75%
  • Bank of Japan leave rates on hold at negative levels.
  • Federal Reserve cuts cash rate form 2.0% to 1.75%
  • NZ GDP q/q rose from 0.4% to 0.5%

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