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Currency Market Analysis

Aug 21, 2019 | Currency Market Analysis

Global Themes

Calm before the storm

Languid markets eye Fed chairman’s speech at Jackson Hole

Another night of unusual calm in FX markets has us preparing for when the storm may hit this Friday night. The latest global dairy auction showed prices contracting by 0.2%, the sixth drop in the last seven auctions. The effect on Kiwi pairs was rather benign however, with NZD/AUD and NZD/EUR drifting slightly lower overnight.

Without fresh market impetus the New Zealand Dollar is in a tight holding pattern at present, hovering just above four year lows. We think we will get that spark on Friday night when Fed chairman Jerome Powell gives his Jackson Hole speech on “The Challenges of Monetary Policy”. With the European Central Bank likely to slash their refinancing rate and potentially unveil a fresh raft of stimulatory measures in September, the pressure will be on Powell to signal further easing by the Federal Reserve. Will this be a case of waiting for Godot that will ultimately leave Kiwi importers disappointed, or might it be the trigger for a reversal higher?

Trump talks tax cuts

President continues to heap more pressure on Fed to lower rates

It’s finally happening. After so much focus on the use of monetary policy to boost slowing global growth, governments are now turning back to fiscal stimulus as their next resort. In June Australia unveiled a $158B fiscal package that sent Australians rushing to tap into their $1080 tax rebate. As Germany showed economic contraction in Q2 earlier this week the talk of a massive fiscal stimulus package has become louder. And overnight President Trump joined the trend, suggesting payroll tax cuts may be coming. Of course he has already implemented massive corporate tax cuts back in 2017. With the US budget deficit rising rapidly it’s hard to see how they can afford further tax cuts, but as we’ve said repeatedly of late, this is a President who will stop at nothing to get both his approval ratings and the stock market higher in preparation for the 2020 election.

Meanwhile Trump’s attacks on the Federal Reserve continued last night as he tries to pressure them to signal further interest rate cuts ahead. For a central bank who is hellbent on preserving their independence we wonder if this approach is counterintuitive, but it’s not the President’s style to sit back and watch. Market reaction has been rather muted to the payroll tax cut idea, but should it become a reality then NZD/JPY could be a major benefactor, as you would imagine it would fuel another leg higher in stocks and risk currencies.

Fed minutes due tonight

Brexit developments watched as deadline approaches

Local credit card spending data highlights a rather quiet calendar today. The main upcoming release will be the latest Fed minutes due at 6am tomorrow. This is from their July meeting where they cut 25 basis points. We’re expecting to see a few dissenters but we are wondering how much support there was for a 50 basis point cut? A surprise there could nudge NZD/USD higher.

We’ll also be watching developments in the UK where PM Boris Johnson is talking tough on the Irish backstop. Overnight German Chancellor Angela Merkel suggested “practical solutions” were needed to resolve the border issue, and that got the Pound moving higher on hope that negotiations may be reopened by the EU. NZD/GBP is back close to two month lows as a result, but we’ve not changed our mind on this one since last October - the only way out we see is a fresh UK general election, and consequently we’re not expecting NZD/GBP to keep heading south for much longer.

By Alex Ross, NZ Corporate FX Dealer

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