Global Themes

22 March: Kiwi unable to hold GDP gains

Importers snatch and grab on volatile spike

Gauging expectation is a big part of forecasting potential FX moves and we saw that yesterday in NZD/USD. Earlier this week we’d hinted that a more dovish Fed could surprise, and that Q4 GDP could be more resilient than markets were expecting. We got both those outcomes yesterday morning, and NZD/USD exploded 1.5% higher above the 0.69 level. But then reality kicked in. Despite the robust 0.6% expansion in the December quarter, this still represented the first time that annualised growth has fallen below 3% (to 2.8%) since 2014. Furthermore, looking at 2 year interest rate swaps the Greenback still holds a 70 basis point edge over the New Zealand Dollar. That’s a pretty good reason for investors to prefer USD over NZD.
In a nutshell the market was set up to sell NZD/USD lower yesterday but when the data didn’t arrive as some had expected we saw a swift and sudden squeeze higher. Next week we get the RBNZ on Wednesday and while the 0.6% growth rate didn’t meet their 0.8% forecast we don’t think that will deter them from their “next move may be up or down” stance. Given market expectation, that on its own may not be enough to keep the Kiwi buoyant as we head into Q2.

Aussie unemployment falls

Meek employment growth, but may be enough for the RBA (for now)

The other big release from yesterday was Aussie jobs data. From where we sit the result was mixed and didn’t quite justify the resultant spike in the AUD, but once again that is possibly because the drop in the unemployment rate to 4.9% and a gain of just 4.6K jobs was better than some of the market bears (ourselves included) had expected. Underlying the data was a drop in full time employment by 7K, and a squeeze lower in job market participation.

Given January/February are seasonally good months for job expansion in Australia we think the RBA should be worried by these numbers, but it doesn’t really matter what we think. We suspect they will stick to their guns at the next April meeting, reaffirming their RBNZ-esque “next move could be up or down” stance. The 2 year swap rates favour NZD by 25 basis points now and that should be supportive of NZD/AUD, but we’ve traditionally seen some March quarter end flows back into AUD and that could see us take a breather back towards 0.95 in the immediate.

May extension for May?

May 22 Brexit extension gives May one last shot of a deal?

Might they? May they? We wait on the EU’s response to Theresa May’s Brexit extension submission to June 30. The landscape looks positive but all roads seem to point to an earlier May 22 deadline. We’re not sure May will be happy with May (the month that is) but some hope is better than no hope.

The likelihood of a shorter extension pounded the Pound overnight, which slumped another 1% lower versus the USD. NZD/GBP nudged a half percent higher to fresh 4 week highs. If you think all this double wordage is sounding like some Edward Lear nonsense well it’s been a long week and it kind of seems apt for Brexit right now. Just some European PMI data tonight and Canadian retail sales. And don’t forget the 2 minutes silence for the Christchurch fallen today. Let’s hope this closes off a never to be repeated chapter in our nation’s history.

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