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Trump halts tough talk on tariffs

Market Overview:

Good news emerged from the G20 weekend meeting, with U.S. President Trump and his Chinese counterpart Xi Jinping agreeing to hit the pause button on the introduction of new tariffs and intensify their trade talks. This saw US equity markets jump higher with the S&P 500 up over 1%, while the Aussie, New Zealand dollar and the currencies of South Africa, Turkey and Mexico all rose. Shares from Sydney to Seoul gained and the 10-year Treasury yield jumped back above 3%. The greenback traded lower against most of its large developed-market counterparts. Trump and Xi have now agreed to halt any new tariffs for 90 days as the countries continue negotiations. The U.S. had been scheduled to push ahead on Jan. 1 with increased tariffs on $200 billion worth of Chinese goods. Although far from resolved, the easing in tensions between the leaders of the world’s largest economies goes some way to assuage sentiment that’s been weighed down by concerns that the trade war is having a damaging effect on global economic growth. Also adding to a more positive tone were last week’s dovish comments from the Federal Reserve around interest rates approaching more neutral levels which helped propel a revival in risk taking. We expect this more “risk-on” approach to be the prevalent theme over the coming week for both equity and currency markets. Market focus will also be on US data released throughout the week, culminating in the Non-farm payroll data on Friday, the last for the year. Read more

FX Update

Australia

Seasonally adjusted construction figures disappointed Wednesday after numbers showed a declining sector. The total construction for September fall 2.8% for the quarter based on predictions of 0.9% growth. With Melbourne and Sydney house prices dropping recently this follows a trend which could follow through well into 2019. Comments from last week’s RBA minutes concentrated on the importance of the Australian Dollar playing a part in setting future monetary policy. Its business as usual for the RBA unless a sudden market shock event was to surprise. In the event of a strengthening global economy, the effect on the Australian economy and the outcome on the exchange rate of the AUD would be pivotal. Fed chairman Powell spoke Wednesday night making dovish comments towards further tightening bias which turned markets to risk on with the Aussie Dollar pushing north versus the big dollar. Private Capital Expenditure released at little light at -0.5% based on predictions of 1.1% but had no real effect on price.   

New Zealand

The New Zealand Dollar, surprisingly, after running the numbers has been the strongest currency of the main basket since August 2 2019 outperforming everything with the greenback a close second. On August 2 we were trading around the 0.6780 area compared to today’s price of 0.6860 level. Clearly this is no huge shift in price action but with a short spell to 0.6420 it shows how resilient the NZD has been compared to its rivals which have all devalued in comparison. Adrian Orr delivered his Financial Stability report Wednesday saying the NZ financial system is sound and while offshore trade risks still are a little unsettling, economic risks have abated. LVR lending ratios were lowered in favour of the investor and home owner suggesting credit banking credit risks are in a good spot currently. ANZ Business confidence printed bang on expectations with no surprises. Interests now lies with G20 tomorrow.     Read more

EU Approves Brexit Withdrawal

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Market Overview:

The New Zealand Dollar was first out of the blocks Monday morning with Retail Sales printing much worse than markets predicted. The total value of retail sales increased 0.0% from the previous quarter with growth in the Waikato region up 2.2%. The real tale though was that markets were expecting figures to be much better around the 1.0% mark so 0.0% was disappointing. The New Zealand Dollar falling away sharply continuing its momentum to the downside from last week’s risk off close continuing as the week’s worst performer against the main basket. In a week of low volume trading we saw super thin conditions with US Thanksgiving and Japanese Holiday holidays. Late Friday it was good to see most currencies show a bit of movement albeit to the downside from the rather stagnant week we had. Risk off themes we think will continue this week with Brexit leading the way. The EU has officially endorsed Theresa May’s terms of the UK’s withdrawal agreement bringing an end to negotiations which have gone on now for 20 months. The tough part begins this week when Theresa May will now entice the UK Parliament to agree on the terms of the agreement, she will spend the next fortnight travelling the country selling the deal before a parliamentary vote which will take place in early December. China will front at this week’s G20 summit in Argentina showing the world that they are cutting their reliance of exports in an effort to derail Trump’s government of allies in the ongoing trade war. Last week US trade representative Lighthizer said that China has not changed its tactics or practices and that this has dampened hopes for an agreement at the upcoming summit. China reacted by saying this was totally unacceptable and that the US government has broken its commitments to world trade organisation members. Beijing current account is nearly neutral after peaking in 2008 at 421 Billion surplus. Even with China’s weak equity market and slowing economy China are still unwilling to budge, China exports continue to grow based on recent data despite the tariffs. Markets are unsure how this will eventually be resolved but with further uncertainty and perhaps negativity this week we expect the recent risk averse theme to continue. Crude Oil was the biggest mover Friday when it was devalued by over 6.5% to 50.70 narrowly escaping price action in the 49’s after traders liquidated the asset after Trump’s earlier calls for lower oil prices and the global growth outlook weighed heavy. This week should see reasonable excitement with Fed members speaking and RBNZ, Adrian Orr Wednesday around financial stability. Read more

FX Update

Australia

Tuesday’s RBA November meeting minutes came and went without the Australian Dollar giving a jot. Comments from the RBA concentrated on the importance of the Australian Dollar playing a part in setting future monetary policy. Its business as usual for the RBA unless a sudden market shock event was to surprise. In the event of a strengthening global economy, the effect on the Australian economy and the outcome on the exchange rate of the AUD would be pivotal. The RBA went on to say- if global economic growth was to slow next year the RBA will need the Australian Dollar to weaken to combat the need to cut the cash rate. With markets turning risk averse and the US markets taking a breather with Thanks giving the Aussie could ease back across the board towards the weekly close.

New Zealand

Global uncertainty and a lack of risk appetite continue to be the theme in currency markets at the moment with plenty of risk averse news creating nervous conditions. The kiwi came off last week’s high against the greenback of 0.6870 falling to 0.6780 in thin markets. A wait and see approach with Brexit headlines looming seems to halted any market movement. Liquidity is set to diminish from today with US Thanksgiving holiday closing US equity markets. New Zealand’s population figures for the year to October shows a net gain of 61,700 people, this is the lowest it’s been since September 2015. The biggest drop was the number of people arriving permanently from China down -10.8%. In the past migration figures have been a driver of growth in NZ. No significant local data to publish until next week’s quarterly Retail Sales. Read more

Brexit fallout continues to spook markets

Market Overview

Currency markets ended the week uneventfully after a huge week of Brexit related headlines. Currencies took a much earned breather with direction extremely tough to pick later in the week. The weakest currency of the main players the British Pound depreciated over 1.1% against the US Dollar and 3.1% against the surging kiwi Dollar. The New Zealand Dollar remains the strongest currency two weeks straight with analysts a tad baffled as to the ongoing bust through key resistance levels. A shift in Fed speak from Philadelphia Fed Reserve Harker rocked the boat when he said he wasn’t convinced a hike in December is the correct move to make citing rising uncertainty of economic outlook. Fed’s Evans also summarised by saying international trade is slower with Brexit and the US housing market all creating global uncertainties. It was his opinion though that these factors were not enough to make changes to the current monetary trajectory. This week’s RBA minutes looks to be a key headline this week when they will summarise the November meeting, with more than likely a hawkish bias based on recent positive economic data. US and China trade discussions have surfaced again over the weekend after weeks of halted communications. Both sides are working together closely to arrive at a long term solution with Donald Trump and Xi Jinping expected to meet again later in the month at the G20 summit in Argentina. Meanwhile Vice president Pence spoke with Xi Jinping at the Papua New Guinea Asia Pacific economic summit saying he was concerned China never had any intention of reaching a consensus – the Papua New Guinea prime minister saying the entire world is worried about the ongoing tensions between the two nations. They still appear a world away with negotiating a sustainable agreement. Brexit carnage will continue this week leaving the British Pound venerable again to whipsaw movement. Recent headlines are suggesting a vote of no confidence is building steam with Theresa May saying if she was ousted it wouldn’t make Brexit any easier. Last week Brexit secretary Dominic Raab and work and pensions secretary Esther Mcvey resigned in protest of May’s Brexit plan. US and Japanese Bank holiday Friday with Thanksgiving should bring an orderly end to the week. Read more

FX Update

Australia

More positive data has supported the Australian Dollar with key employment data Thursday doing the business. Wages (Wage Price Index) rose 0.6% in the quarter to September and 2.3% y/y with statistics showing improved labour market conditions and the official unemployment rate dropped from 5.1% to 5.0%. Jobs rose 32,800 in October compared to 20,000 markets were predicting led by full time jobs participation. The RBA has kept the cash rate on hold at 1.5% for over two years now, although they have recently acknowledged stronger employment and reasonably quick economic growth. The Australian pushed higher on the releases across the board reaching a five week high 0.7280 against the US Dollar. With recent falls in Crude Oil prices falling to below 60.00 the Australian Dollar has been sensitive to these downward moves as the economy is commodity based. With monetary policy minutes on Tuesday we should see further hawkish bias based on this week’s positive data.

New Zealand

The New Zealand Dollar is still riding high on last week’s strong employment figures, the best performing currency across the eight major players since the 7th of November. US Equity markets have declined in value over the week, but the kiwi has remained staunch. Better than expected Chinese data Tuesday boosted risk sentiment when Industrial Production released at 5.9% after 5.8% was forecasted. The fear though is that the with deadlines approaching on trade tariffs, manufacturers have boosted production to avoid the new levy in January skewing the figures from potentially a weaker result. The main event news this week has been with Brexit updates, affecting risk sentiment during Wednesday’s overnight sessions but able to break the kiwi into any sort of bearish mood which was highly unusual.   Read more

Update

US Equities trade lower taking risk currencies off highs

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Markets are still figuring out what it all means post US elections and Fed policy announcement. Initially the reaction has been mixed but with a general US Dollar up theme and risk on markets. We are still looking at Fed policy normalisation at a time where there is heaps of downside risks including global trade. Any downside to equity markets and sentiment from here will not bode well for risk associated products and could bring back topside failures in major currency pairs. With a US Holiday Monday celebrating veterans Day markets should ease into the week. The New Zealand Dollar was the standout performer last week with unemployment dropping to a 2008 low of 3.9% from the 4.4% markets were expecting. With risk factors this week expected to drive price action we could see the kiwi ease back towards last week’s open of 0.6650 levels.  EU and UK negotiators are close to a breakthrough with both sides aiming to get political approval on the Irish border backdrop. President Trump has upset fire besieged California when he tweeted about the mismanagement of forestland and threatened to cut federal funding to the state. Fires in southern California have killed more than two dozen people and destroyed over 6,500 buildings forcing the evacuation of over 250,000 people. The fires are the worst in California history with Trump expressing no sympathy for those caught in the fires, instead using the catastrophic event to criticise the state’s environmental regulations. We have several key data releases on the economic docket but geopolitical news could influence shifts in currencies the most. Read more

International Trade

FX Update

Australia

Tuesday’s RBA cash rate announcement turned out as we predicted summarising recent rhetoric regarding monetary policy and retaining the current rate at 1.50%. The current rates are consistent with sustainable economic growth which has been revised up for 2018 and 2019. The RBA also think the unemployment rate will reduce to around 4.75% in 2020 with a lift in Wage growth. The elephant in the room was the ongoing pessimistic view of the housing market. The RBA is becoming uncomfortable with the declines in Sydney and Melbourne prices. If credit tightens we could certainly see values go south putting a squeeze on consumer behaviour. US Midterm election voting caused market volatility Wednesday but as results were published suggesting the Republicans would retain control of the senate risk markets improved and the Australian Dollar posted fresh highs.  Read more

NZ Employment Data

This mornings NZ Jobless rate has pushed the NZD/USD to a 3 month high of 0.6732.

Figures releases today at 10.45 has seen the NZ unemployment rate plummet from 4.4% to 3.9% surprising markets, the lowest level since August 2008. Reflecting a sharp drop in the number of unemployed was the increase in the number of employed people jumping from 0.5% to 1.1%. One would expect the monetary policy statement tomorrow to now be quite hawkish. The NZD/AUD has jumped to trade above 0.9300.

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US Mid-Term elections hold key to market risk

Market Overview:

Melbourne Cup runs today at 5.05pm NZT.
The potential future of Donald Trump’s presidency could be decided this week with US Midterm elections taking place. The Democrats need only 23 further seats to make a total of 218 to take control of the House, polling starts Wednesday NZ time. The world’s economies have enjoyed a buoyant year with the international Monetary Fund in April saying the planet was enjoying the most united upswing since 2010. The mood however has changed in October when they cut its global outlook saying global growth has plateaued. The change is being led by China with the weakest current stretch of performance since 2009 is expected to get worse unless a favorable deal can be negotiated in the trade war with the US. The Eurozone is also losing pace expanding in the third quarter less than the previous quarter as Germany and Italy staled. The big question now is if recent US growth can continue providing good results on the back of protectionism and higher interest rates heading into 2019 and provide a counterweight for the rest of the world.  Reports have indicated that a potential trade deal could be close between China and the US. Trump’s lead adviser Kudlow has played this down when he said “no massive movement to deal with China” and “we’re not on the cusp of a deal”. Chinese manufacturers who have the misfortune of being on the list of affected companies who will have tariffs raised from 10% to 25% on a 1 January 2019 are flat out producing products for export into the US markets to make shipping deadlines before the due date. US Non-Farm Payroll employment increased by a healthy 250,000 jobs Friday for the month of October well up on the forecasted 190,000. Wage growth has risen by 3.1% year on year, this is the fastest increase since 2009. The greenback rallied along with the US 10 year treasury bond jumping 8 points to 3.21%. US equity markets turned negative – the Nasdaq falling 1.20%. Three central banks will release cash rate announcements this week starting with the RBA Tuesday with no change from the 1.5% expected. RBNZ Thursday with no change from 1.75% expected and Federal Reserve also who will keep their benchmark rate at 2.25% Read more