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Currency Market Analysis

Aug 23, 2019 | Currency Market Analysis

Global Themes

Waiting for Godot

Kiwi crumbles to lowest since January 2016 as eyes turn to Powell

In Samuel Beckett’s famous 1953 tragicomedy the lead characters Vladimir and Estragon are seen waiting around for Godot. They wait throughout the entire play but ultimately Godot never arrives. It’s been held up as a religious or philosophical commentary over the years, but it might just be a good analogy for the Kiwi right now, which is waiting on a speech from Fed chair Jerome Powell tonight. To be sure Powell will be speaking at Jackson Hole, but there’s a growing risk he might not provide markets and the New Zealand Dollar with the shot in the arm they are waiting on.

Overnight we heard from the Federal Reserve’s Patrick Harker and Esther George. They both suggested that now is not the time for further accommodation, citing a strong labour market and solid wage growth.  That got stocks and bonds a little jumpy. According to the CME Group’s Fedwatch tool there’s still an 81.1% chance of a further two rate cuts by the Fed priced in by year end. For what it’s worth we think there’s a reason we are hearing from potential dissenters prior to Powell’s speech tonight. They are putting their case on the record before the Chairman signals a dovish shift. That could see Kiwi rebound from its lowest opening price since January 2016 today, but we are getting more worried that like Vladimir and Estragon, maybe we are waiting on something that will never arrive.

NZD/GBP hits fresh 2 month lows

Merkel suggests backdrop alternative could be reached within 30 days

More support came for the British Pound overnight after upbeat comments from German Chancellor Angela Merkel suggested an alternative to the Irish backstop issue could be found within 30 days. She suggested that the UK and EU could work on a regime that respects both the Good Friday agreement and also ensures the integrity of the single EU market. As for the details well we are wondering what that is - might it simply be the UK deciding to Remain?

Regardless of our cynicism NZD/GBP dropped like a stone overnight falling over 1.5% as markets got frothy about a potential Brexit deal prior to the October 31 deadline. Have we underestimated the mastermind that is Boris Johnson? Or is Germany’s slide into recession pushing them closer to a deal that will secure the UK as an ongoing trading partner? We remain cautious about punting NZD/GBP much lower than here but like the continued slide in NZD/USD this one is defying our expectations at present.

Retail sales eyed this morning

Forecast uptick of just 0.1% for the June quarter

Expectations are low heading into June quarter retail sales data this morning where economists’ median expectation is for a mere 0.1% quarterly uptick. For a bruised and battered Kiwi we’re nervous about the release, but we’ll give the consumer the benefit of the doubt here on the back of some solid credit card spending numbers through Q2, and look for an uptick of 0.4% which can stem the bleeding today.

Tonight it will all be about the Federal Reserve’s Jerome Powell. Will he deliver the sign that several more rate cuts are to come or will he thumb his noise at Trump who is calling for 100 basis points of cuts in the months ahead to perhaps “make America great again”? Either way we think this morning’s 43 month lows make for good export buying, particularly early doors ahead of those key retail sales figures due at 10:45am this morning.

By Alex Ross, NZ Corporate FX Dealer

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