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FX Update

Markets have been risk off for most of the week contributing to a shift lower for the kiwi and Aussie. US Equities have traded in the red with the S&P down over 2% surrounded by uncertainty in the ongoing US/China trade negotiations as we headed into Friday.

The US/China trade dispute rumbles on this week with President Trump finally losing his cool when China returned part of the negotiated draft deal with lines crossed out through most of the concessions negotiated over the past few months. The mood surrounding the trade talks, it’s fair to say, has taken a turn for the worse over the past few days after talks of a deal going from immanent to distant. Trump has responded by threatening to raise the existing 200B tariffs and impose new ones on an additional 325B worth of products. It’s unclear at this stage whether the two countries can make a deal before the new tariffs come into effect in the next day. Chinese Liu and his team will travel to Washington in last minute attempts to prevent spiralling out of control, talks will start at 5pm EST which is 9am Friday NZT.  

Tuesday the RBA left the cash rate unchanged at again at the record low of 1.50%. It was always going to be a 50/50 call on whether they would cut or not. In the statement by RBA governor Lowe he never explicitly said they were shifting to an easing bias, but the signs are still there for a cut later in the year based on current fundamentals. Again pinning economic hopes of improving employment to boost the economy, Lowe will be watching the labor market over the coming months to gauge further targets. Markets are still pricing in a drop in the next 12 months- possibly two. They may not wait to long if CPI inflation continues to fall like is has in the last quarter of 2018 from 1.8% to 1.3% in the first quarter of 2019.  

The Reserve Bank of New Zealand surprised markets by cutting the cash rate 25 points from 1.75% to 1.50% at 2pm Wednesday in a unanimous 0-6 vote by the new monetary policy committee. Global growth has slowed since the last quarter of 2018 so a cut was necessary to support the outlook for employment and inflation. The RBNZ sees annual CPI at 1.7% by June 2020, improving off the 1.5% currently. The New Zealand Dollar initially moved significantly lower across the board but had soon strangely retraced more than 50% of the downward move by the time the European and NY trading sessions opened.

While Chinese equity markets slipped drifted lower midweek based on the ever present trade disputes the Chinese y/y CPI came in as predicted at 2.5%. Trade Balance was another story with a big miss for April figures at 13.8B surplus based on expectations of 35B markets were expecting. This is a massive drop from the March number of 32.6B surplus and highlights the fall out from the ongoing trade war.

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