Global Themes

24 May 2019
Kiwi on the rebound?

Are soft PMI numbers first sign that tariff wars are hurting US economy?

Local importers got their first taste of good news overnight as softer leading purchasing and manufacturing (PMI) indices showed perhaps the first real signs that the tariff wars are hurting the US economy. The Manufacturing PMI came in at just 50.6 versus expectations for a print of 52.7, recording its lowest level since September 2009. Furthermore new orders contracted for the first time in 10 years as well.

The services PMI also fell to a 40 month low of 50.9. A print above 50 shows sector growth. The data shows the dichotomy of tariffs, with the potential for higher inflation but lower growth.

This combination is often the best recipe for a recession.

Stocks and the US Dollar fell on the release, while Yen pairs continued to weaken. We foreshadowed yesterday how slowing momentum in the fall of NZD/USD was a potential signal for a rebound, and with the bounce back over 0.65 last night we believe we have seen confirmation of that.

By no means are we long term bullish on this pair but forex markets rarely move in a straight line, and so a near term retracement back towards 0.6550 or an optimistic 0.6670 is something that importers should look to take full advantage of by virtue of market orders.

Huawei - trade or tactical?

Note from Deutsche bank on the saga yesterday raises a good question

The Huawei ban, then temporary reversal, has fast become the centrepiece for the US/China trade war. But is it all about trade?

A note from Deutsche Bank analysts yesterday posed this very question and the allusion was perhaps that it was not. As the bank asked “in the coming decade will China’s military operate on US software, and will the US military operate on ‘made in China’ hardware?”. We’d say maybe not and hence that suggests a larger disentangling of current supply chains.

That’s certainly the inference from the Chinese government who in the last few days have suggested they will look at investing more in their own intellectual property, and ensuring they control the end to end supply chain in its entirety. You could argue that might be a win for President Trump but perhaps not in the way he wanted.

In currency markets that could be supportive of NZD but more particularly AUD in the long term as China will still need the raw materials for manufacturing such supply chains and technology. It may also lead to more direct trade against the Yuan on these pairs rather than the US Dollar.

For now the spat seems to have reached a cooling of period, and that can also help Kiwi pairs nudge higher after a horrendous seven weeks.

PM May’s future in balance

Pound under pressure as markets react unfavourably to hard Brexit PM

Further rumours that we may get a resignation from PM Theresa May as early as tonight have pressured the Pound with NZD/GBP back at 3 week highs.

Markets are spooked by the fact that her replacement may push a hard Brexit, particularly given betting markets favour Boris Johnson to be the next PM.

We believe we can see further upside in this pair in the near term.

Today we get local trade balance data ahead of US durable goods data tonight. That pair of releases can edge NZD/USD higher should US data follow encore last night’s disappointment. And finally all eyes will be on the Euro amidst European election results this weekend. Can the major parties rebound or will the Eurosceptics prevail?

As always we’ll keep you posted on Monday.

By Alex Ross, NZ Corporate FX Dealer

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