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Currency Market Analysis

Sep 22, 2020 | Currency Market Analysis

Global Themes

• Tuesday Technicals - Export prosperity
• What the Experts Say?
• Coming up this week?

Tuesday Technicals - Export prosperity

Overnight we saw the Kiwi move lower on the back of a broad selloff in equites and commodities.

China is New Zealand’s largest trading partner. In 2019 we exported for 23% of our products and services to China and imported around 16% from them, resulting in a trade surplus of NZD 6.8 billion. Strangely enough though the vast majority of those transactions are paid for in USD and not the Renminbi (or Yuan). In the late ‘70s, China set about economic reforms which lifted about half of its vast population out of poverty after just a few decades. An export driven policy would bring in much needed foreign currency which it uses to build up its infrastructure.

The one thing that China did differently to most large trading nations is the they continued to manage their exchange rate. The rate is managed to favour exporters by pegging it to the USD, although the CNY rate has been allowed to appreciate from 8.28 when the peg was first introduced to around 6.75 today. China has continued to reform its trade policies, albeit at their own pace. Many feel it is still undervalued and would like to see it trade more freely to better represent the actual supply and demand dynamics that affect other countries.

In today’s chart we look at the dynamics between the NZDUSD and the NZDCNY. Based on the high correlation of these pairs we can see that there are indeed times of diversion, but they do tend to move back toward each other. If this were to repeat itself, there are basically three ways for these pairs to return to their more normal state of correlation. The NZDCNY could push higher and the NZDUSD remain firm, the NSDUSD pair could go lower as the NZDCNY remains relatively stable or a combination of the two where the NZDUSD could go lower while the NZDCNY moves higher.

Considering the fact that New Zealand has a Trade Surplus with China and the RBNZ in all likelihood prefers a lower NZDUSD lower to protect the export income to the country. Throw in the growing prospect of negative rates, which if called upon should have an impact on the NZD’s strength. Mix this in with our thoughts in previous reports that we feel the NZDUSD has recovered well and is trading at elevated levels. Then finally throw in the possibility that the NZDUSD could trade substantially lower to close the gap highlighted in the chart, and the verdict is it may be worth importers taking a look at some hedging strategies very shortly.

What the Experts Say?

Westpac – “The RBNZ may acknowledge the economy’s resilience, but we don’t expect any change to monetary policy or signaling at its Monetary Policy Review this week. The RBNZ’s ‘least regrets’ approach suggests that it will bank the recent run of stronger data rather than respond to it.”

ANZ – “This week we expect a continued dovish tone from the RBNZ, reiterating that a negative OCR and bank funding for lending program lie ahead, alongside a reiteration of forward guidance. But although we don’t expect these things to change, that may come as a surprise to markets, where pricing is increasingly reflecting a view that the RBNZ may renege on its commitment to keep the OCR on hold until March.”

BNZ – “There is no way the cash rate will be lowered given the Bank’s, recently reiterated, “promise” to keep it at 25 basis points until at least March 2021.”

Coming up this week?

The big one this week will the RBNZ meeting on Wednesday at 2pm. We are not expecting any change in policy here but are expecting the bank to reiterate its readiness to add more stimulus if required. We will have an in-depth preview on this tomorrow morning. Fed chair Powell was speaking overnight and did not add any further fuel to the dovish USD tone following last week’s lower for longer message at the FOMC meeting. It will be a busy week for Fed chair Powell as he will be testifying to the house throughout the week and some unscripted moments could give us some much-needed volatility. The September round of flash PMIs for the US and Europe will give the usual timely read on whether the recovery in global activity continued in September. A solid set of numbers here would add to the recovery in risk appetite and hence support the NZD. And finally, the GBP should continue to be dominated by the UK-EU trade negotiations headlines as we drift towards the October 15th deadline.


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