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Currency Market Analysis

Oct 15, 2019 | Currency Market Analysis

Global Themes

Doubts linger over the solidity of Brexit and US/China trade deals

Last week ended with a buzz of positivity. The maximum suitcase remains unopened, and talks of “Phase One” and “dual customs union” led us to believe that a US/China trade deal and Brexit agreement were imminent. The harsh reality though, is that there are four other low value suitcases still on offer. The negotiation to secure a deal now seems more practical, but the offer from the dealer is not so palatable. In their own ways Trump and Johnson need to secure a deal for their respective economies without selling their position, and that’s going to be a hard act to achieve.

That damper sentiment saw some retracement in currency markets overnight. Kiwi pairs largely drifted lower, with the NZD falling by 0.6% against the USD, EUR and JPY. It remained stable against the Pound, which suffered similar losses, but also edged lower against the Aussie Dollar, which ironically holds higher on muted trade deal hopes.

Chinese imports, exports plummet

Another reason for the lower Kiwi today is a sharp drop in September trade data from China. Figures released yesterday showed a larger than expected trade surplus, but in Yuan terms both imports (-6.2% YoY) and exports (-0.7%) were well down. The significant fall in imports will not please local exporters, and shows that slowing Chinese demand might be more of a problem for the Antipodean currencies than the headline grabbing trade war rhetoric. NZD/CNH fell 0.7% yesterday on the news.

Locally the RBNZ was also seen buying April 2020 government bonds. Ala the Federal Reserve, Bank of Japan and European Central Bank, the move was done for “liquidity management”, not as a quantitative easing measure to increase money supply, but it didn’t stop traders finding another reason to sell the Kiwi on the news, notably NZD/AUD. We’ll be watching this space moving forward, particularly as we approach zero interest rates.

RBA minutes, Chinese inflation today

The Reserve Bank of Australia release the minutes from last fortnight’s meeting today. We’ll be keen to see what reasons were used to justify the cut to a record low of 0.75%, plus find any clues that may reveal an appetite to cut further. NZD/AUD could see some upside if the outlook remains negative here.

That is followed this afternoon by Chinese inflation. A softer number could spark the need for further PBOC stimulus, and be s double whammy for the Aussie Dollar. We also get the latest round of dairy prices tonight, ahead of the key local Q3 inflation print, which we will preview for you ahead of its release tomorrow morning.

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