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Currency Market Analysis

Apr 01, 2020 | Currency Market Analysis

Global Themes

Kiwi relapses as contagion fears escalate

• Kiwi slammed as COVID-9 spread continues
• V-shaped recovery in China?
• This is not a level playing field

Kiwi slammed as COVID-9 spread continues

It was an aptly rough night for the Kiwi, which lost more than 1% in overnight markets to finish over 12% down for the March quarter. That's its worst quarterly performance since the GFC. Once again it was COVID-19 related fears that sent stocks and commodities tumbling. The global case count sits at 837,000 with the death toll now a shocking 41,000 (source: Worldometers). That's weighing on investor sentiment, and continues to suggest this week's surge in stocks and risk currencies might be nothing more than a dead cat bounce.

Assisting the US Dollar was the fact that US consumer confidence held up pretty well at 120.0 versus a previous 132.6 read, while the Chicago PMI came in at 47.8 versus estimates for 44.1. But make no mistake this move was not about good data, in fact quote the opposite. US investment bank Goldman Sachs put out a call for US GDP to be -34% in the June quarter. That would easily be the worst number released since records began in 1947. The worst quarter during the financial crisis was - 8.4%. And Goldman aren't the only ones predicting a major slump. Deustche Bank (-33%), JP Morgan (-25%), Wells Fargo (--14.7%) and Morgan Stanley (-30.1%) are all suggesting a pretty dire quarter ahead. That sentiment was enough to see stocks down and risk pairs sell. NZD/JPY is down over 1% today as well.

V-shaped recovery in China?

The sell off in Kiwi and Aussie came in spite of a very robust set of PMIs out of China yesterday. China's manufacturing and services PMIs both moved back into expansionary territory yesterday, with a big beat on expectations. They come as reports emerge that 90% of the economy is back running and fully functional now.

But with reports of much higher death counts emerging in the media markets now seem to be distrusting Chinese data. Just yesterday Chinese authorities have decided to change their reporting on COVID-19 and include asymptomatic cases from April 1 in their overall count. We raised the prospect yesterday that the case count in China might be much much larger than first reported, and how that could change our perspective on the likely success or otherwise of containment theories. Not that we can point fingers at the changing reporting methodology. Try getting a test done locally if your symptoms are merely a sore throat and body aches. You will get knocked back. That aside the market reaction to the Chinese PMI release suggests the market is yet to buy into the concept of a v-shaped Chinese recovery just yet. Whether that is a fair assessment or not we will see in the months ahead, but if it holds true it should be supportive of NZD and AUD in the medium term.

This is not a level playing field

On Monday the Reserve Bank of New Zealand announced they will be deploying yet another tool to help soothe markets. Every Tuesday it will offer around $500M for terms up to 3 months in exchange for eligible Corporate and Asset-Backed securities in its new Open Market Operations (OMO). In the US the Fed have announced overnight the establishment of another round of swap lines with central banks, that is basically designed to allow access to US Dollars without foreign creditors having to dump US assets. The US is a massive net debtor with foreigners holding $39T in US assets versus Americans owning around $28T. The Fed is also continuing to buy every investment grade corporate bond they can find in exchange for liquidity.

The problem with such repo operations in the corporate bond market is that it creates an uneven playing field. While McDonalds might be able to offer up a corporate bond to the Fed or RBNZ in exchange for a short term cash injection do you think the local burger shop can? The answer is no they can't, and unfortunately in our ravenous demand to stop a deep recession we are simply reallocating more and more resources into the corporate sector. As asset price reflation has locked first home buyers out of expensive city markets do we really want to repeat that in the small business pace? Let's hope that new wave thinking doesn't spread to New Zealand, where small businesses are the lifeblood of our innovation and economy. Look out for a series of European PMIs tonight, which may risk NZD/EUR higher, plus private sector jobs data from the US as we begin what might be another rocky quarter in FX markets.

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