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Currency Market Analysis

Aug 20, 2019 | Currency Market Analysis

Global Themes

Slowing momentum in Kiwi pairs

Could the one month downtrend in NZD/USD be about to turn?

The New Zealand Dollar has fallen 5.5% over the last month, and slid a further 20 points overnight as an uptick in US yields pressured commodity currencies lower. But a quick look at the technicals shows  the Moving Average Convergence/Divergence (MACD) starring to flatten out. In layman’s terms that suggests selling momentum is fading and we may be approaching a near term inflection point. Of course we need a trigger to move market sentiment, and in the absence of any major data that may come in the shape of the Jackson Hole symposium later this month.

Central bankers meet in Wyoming later this week to discuss the challenges of monetary policy. There’s certainly plenty of those going on at present, but the market focus will be squarely on a speech given by Fed chair Jerome Powell in the wee hours of Saturday morning (NZ time). Should he react to recent market developments and signal that July’s cut may have been the start of a longer easing cycle that can be the trigger NZD/USD needs to reverse higher, but if he stays true to his depiction of the cut as a “mid cycle rate adjustment” then that could send NZD/USD tumbling towards the 0.62 handle. For now we are seeing more risk of a dovish shift to the first scenario, but (excuse the pun) we’d hardly be banking on it.

Trump ups the ante ahead of Jackson Hole

US President calls for 100 basis points cut and QE “fairly soon”

Just when you thought President Trump’s criticism of the Federal Reserve had got outlandish enough he pulled another ace from his sleeve last night. He hit Twitter, suggesting that the Democrats wanted the economy to fail ahead of the 2020 election so that he would be voted out. And his advice for Chairman Powell was succinct - “The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well”. Yes this is from the guy who back in 2011 is on record as saying “The Fed’s reckless policies of low interest and flooding the market with dollars needs to be stopped or we will face record inflation”. Horses for courses Donald?

Market reaction to his tweet was fairly subdued last night. Perhaps investors have just got used to his rhetoric, or it was that out of the box that they saw no relevance in it. But what if Powell sticks to his guns at Jackson Hole and fails to signal further easing? Personally we think a few percentage points shaved off US GDP might be a better outcome than printing more money, increasing the budget deficit and sending interest rates back towards zero. But we are sure President Trump disagrees. As we’ve stated before this is a President who will do anything to keep his ratings and the stock market  buoyant, and if Powell doesn’t help with that then don’t rule out Trump intervening in currency markets come September.

RBA minutes due today

Dairy auction tonight

Speaking of QE we have the Reserve Bank of Australia minutes out today. It’s a bit of an outrider but could we see some discussion of unconventional policy measures in there? We doubt discussions are quite there yet but Japanese investment bank Nomura now sees a 40% chance of quantitative easing in Australia in the next couple of years, and continues to forecast at least two RBA cuts by February. While they should still show an easing bias we’re not sure the minutes will be altogether that dovish.

Later tonight we get the results of the latest dairy auction. With 5 out of the last 6 showing price contraction we don’t hold high hopes for tonight’s print, particularly given a weaker Yuan may be a deterrent to Chinese buyers. Disappointment there, along with a more resolute set of RBA minutes today, could see NZD/AUD drift lower again over the next 24 hours.

By Alex Ross, NZ Corporate FX Dealer

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