Global Themes

NZD

Kiwi recovery to face stern test

RBNZ and Fed meetings likely to highlight policy divergence

The New Zealand Dollar had its best performance of the year last week, rallying 2% from Monday’s open near three year lows to close off in the high 0.66s. That recovery looks set to face a stern test this week however, as the now infamous ANZ business confidence survey on Wednesday precedes a double act from the US Federal Reserve and Reserve Bank of New Zealand early Thursday morning. With the US set to raise their benchmark interest rate to 2.25%, and the RBNZ likely to signal they will stay pat into 2020 the yield disparity could trigger a reversal in the Kiwi’s recent fortunes.

Bank forecasts remain mixed ahead of the key risk events - BNZ suggest that the Kiwi may have found a floor at 0.65 as a result of more moderate tariffs from the US on China, a return to risk sentiment and last week’s solid GDP print, while Westpac are holding firm on their year end forecast of 0.64. Either way current levels appear a good opportunity for importers to reduce their currency risk into year end.

Stock markets surge to record highs

Beijing delegation pull out of trade talks

Rising protectionism doesn’t seem to be bothering stock market participants as the S&P 500 and Dow Jones Industrial Average both surged to record highs in the US last week. Walmart are the latest corporation to petition the Trump administration to reconsider its position on trade, claiming the import duties will either be passed onto the American consumer or retail profit margins will be squeezed. Yet further tariffs seem more likely - with the Wall Street Journal reporting the latest Beijing delegation to Washington has now pulled stumps, as hopes for a negotiated solution fade to oblivion.

The improved risk sentiment surged NZD/JPY a mammoth 4% last week, and while the pair has pared back from Friday’s highs, current levels still offer importers a great hedging opportunity into the busy Christmas period.

OPEC meeting watched

Output increases unlikely despite Trump attacks

For those of you that may not have noticed, or Aucklanders who had cynically attributed it all to the recent petrol tax, the price of oil is rising. Supply gaps caused by sanctions on Iran and Venezuela have been major drivers, but it would be a surprise if OPEC were to announce measures to increase production today, despite President Trump’s consistent attacks on OPEC for price manipulation.

The boost in commodities is another reason underpinning the Kiwi’s recovery, and shows how the rise in global protectionism can have an inflationary impact locally. It will be interesting to see if either the RBNZ or Fed comment on this later in the week.

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