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Currency Market Analysis

Jun 14, 2019 | Currency Market Analysis

Global Themes

Where is NZD/AUD headed?

Mixed Aussie unemployment data raises July RBA rate cut chances

Australian jobs data was a pretty mixed bag yesterday. The headline growth through May of 42.3K jobs was well above expectations, but with most of it (39.8K) taken up by part time employment, and the unemployment rate staying steady at 5.2% courtesy of a higher participation rate, it was certainly not all good news. We flagged the effect that the hiring of part-time election workers might have on this number yesterday, and we have to say we think we saw its full effect potentially hide rather anaemic job growth in the rest of the economy through May. To frank this view underemployment data ticked up to 8.5%, suggesting there is still plenty of slack in the Australian labour market.

Last week the RBA suggested unemployment might have to shift back to 4.5% to see any real pressure on wage inflation. We haven’t moved any closer to that figure, and as a result market pricing has ratcheted up on a July RBA rate cut, now rated a 75% chance. Be it July or August we think we will see another cut, and despite a local RBNZ cut being priced in here by November, logic would suggest NZD/AUD might have a look closer to 0.96 in due course as interest rate differentials widen in favour of the Kiwi.

Is Kiwi data softening?

Trend in this week’s second tier data may concern the RBNZ

Speaking of the RBNZ, they next meet on June 26th, and several pieces of second tier data released this week may have them a little more subdued in their outlook. We glossed over it at the time, but Wednesday’s electronic card sales data for May showed a 0.5% drop, and that will certainly translate into softer retail sales numbers for the June quarter. Secondly ANZ’s Truckometer, which uses traffic data around New Zealand as an indicator of the overall health of the economy, ticked up just 0.8% for May versus a 4% increase in the month prior. And lastly visitor arrivals in April looked impressive, but if you compare them with 2017, the last time Easter holidays were fully in April, then they are actually down 1.4%.

Overall that’s a picture of a decelerating economy. Low wage growth, cooling job hiring and a weaker Auckland housing market appear to be reducing household spending, and that’s while the general economy seems pretty immune to international trade wars. All that might lead the RBNZ to another rate cut, and that market outlook seems to be keeping NZD/USD in a wider 0.64-0.67 range for now.

US retail sales eyed

Chinese data slew today

Food prices and a Business NZ manufacturing print will test the theory of weakening local data this morning. They’ll be followed by Chinese retail sales, unemployment, industrial production and fixed asset investment numbers this afternoon. We finish off tonight with US retail sales where a 0.7% monthly growth for May is expected.

President Trump has been on the wires overnight suggesting the tariff war will start hurting China much more than the US, but we’re not bought on his rhetoric. We think Chinese data may hold up today, while US retail sales may underwhelm. That cocktail might give us a higher Kiwi come Monday, and have the President himself under a little more heat to renegotiate a trade deal.

By Alex Ross, NZ Corporate FX Dealer

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