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Currency Market Analysis

Oct 14, 2019 | Currency Market Analysis

Global Themes

Potential US-China currency pact reminiscent of the Plaza Accord


The year was 1985. For movie buffs we first met teenager Marty McFly and his time travelling Delorean. For currency buffs the New Zealand Dollar was first floated on March 4th at a rate of 0.4444. It was also the year that West Germany, France, Japan, the United Kingdom and the US signed the Plaza Accord, an agreement to depreciate the US Dollar against the Japanese Yen and German Mark. The move came in response to growing protectionist fervour in the US, as grain exporters, the automotive industry, heavy industry manufacturers and high tech companies sought protection from an overly strong Dollar and foreign competition. Ultimately it led to a 50% depreciation in the USD/JPY rate in the next two years, and while it led to a significant reduction in the trade deficit with Western Europe, structural conditions meant it failed to alleviate the trade imbalance with Japan. 

This morning we reminisce not just for nostalgia, but in light of fresh talks of a US/China “currency pact” as part of “Phase One” of the weekend’s trade talks. The backdrop of protectionism is very similar. The aim, to depreciate the US Dollar versus the Chinese Yuan to solve a trade balance looks very similar. And the outcomes, one might argue, could also be comparable; a weaker currency but no real resolution of the trade balance due to structural considerations. That’s certainly the view of investment bank Morgan Stanley who suggest such “a currency pact” could lead to broad based USD weakness and a boost in China-proxy currencies, being the Australian and New Zealand Dollars. If Marty McFly and his Delorean were here we could ask him to fast forward to 2020 and tell us what it looks like, but perhaps a trip “back to the future” in 1985 tells us all we need to know. 

Why the Pound might be at risk this week


UK Prime Minister Boris Johnson had an idea to unlock Brexit. Northern Ireland would remain in the UK Customs Union but also be subject to EU customs rules to ensure an open border with the Republic of Ireland. It would mean Northern Irish businesses pay a customs duty on goods coming from the UK, but receive a rebate if they did not cross the border into the EU affiliated Republic. But the Democratic Unionist Party (DUP) are concerned it may be a step too far towards the political and economic isolation of Northern Ireland from the UK, and given they are the major supporters of the Conservative Minority Government in the UK then that’s problematic for Boris. 

To be sure the Pound rallied 3.75% in two days to end last week, its biggest rally since the financial crisis. But if the weekend’s reports of DUP hesitancy are correct, then that surge in the Pound might be at risk of reversal as we begin this week. That could see some upside in NZD/GBP today. 

Trade talk reaction eyed


From Japan to Canada to the US, there are several nations on holiday today and that can lead to thin market liquidity, which might exaggerate any trade talk related moves. Phase One of the proposed US/China deal will allegedly take five weeks to draw up, and is said to involve a deal on IP, financial services and “big” agricultural purchases, as well as that key “currency pact”. It’s also worth noting reaction from the Federal Reserve this week, as the chances of an October cut slid to 75% on Friday. 

Later in the week we get RBA minutes and dairy prices (Tuesday) followed by the key NZ September quarter inflation print (Wednesday). We’ll preview the latter, and what it might mean for the near term trend Kiwi pairs, in our report tomorrow.


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