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Currency Market Analysis

Oct 16, 2019 | Currency Market Analysis

Global Themes

Lower currency could fuel tradable inflation

September inflation is due out this morning at 10:45am, and will be closely watched by the Reserve Bank and market participants alike. The median forecast is for a 0.6% uptick on the quarter, which would see the annualised rate slowing to 1.4%, following a couple of anaemic 0.1% prints in the December and March quarters. Last quarter’s release was also 0.6%. It is worth noting that the RBNZ’s own forecast is slightly lower at 0.5% on the quarter and 1.3% annualised.

That’s important because it sets a lower bar for an upside surprise. We highly doubt the annualised print will be anywhere near their target of 2%, and with markets currently pricing in a 90% chance of a November rate cut we doubt those chances will be significantly effected by this morning’s release. But it can change the market view of where the terminal rate for the current cutting cycle may be. We’ve already seen food prices rise by 1.2% on the quarter, while ANZ’s monthly inflation gauge suggests a 0.8% increase in rental prices. That suggests a strong non-tradable component around the 2.8% mark, while we are expecting a decent uptick in tradable inflation based on a lower Kiwi and some temporary spikes in oil prices across Q3. All in all that has us looking for a stronger 0.8% QoQ print, or 1.6% annually. That outcome should give a decent boost to Kiwi pairs.

NZD/GBP hits 40 month low

NZD/GBP hit its lowest level since the beginning of Brexit overnight, as euphoria over a possible draft Brexit deal surged the Pound. The bill appears to involve the much vaunted dual customs union, which would satisfy the DUP by keeping Northern Ireland in the UK Customs Union, but also keep the European Union happy by operating an effective hard border across the Irish Sea.

What’s unknown at this stage is if the DUP will support such a move. DUP Leader Arlene Foster is set to meet UK Prime Minister Boris Johnson tonight. If he fails to augur her support then that could trigger a General Election, as he tries to rid the ruling Conservative minority of their reliance on the Northern Irish Unionist party. Judging by overnight market reaction that is not the expected outcome of discussions however, and the confirmation of a potential resolution to Brexit could pummel NZD/GBP even lower.

Inflation Wednesday lies in wait

Aside from our local release this morning it’s inflation-mania today as the UK, Eurozone and Canada all release their latest CPI prints tonight. Lower inflation prints can place pressure on central banks to slash rates further, and that can have a weakening aspect on the respective currency. A lower Pound may have boosted the UK’s inflation read, but we are very cautious on the other two releases. Weaker EU and Canadian CPIs can provide some upside to both NZD/EUR and NZD/CAD tonight.

Later on we also get US retail numbers, where a 0.3% growth in sales is expected for September. The US consumer has been the powerhouse of their economy lately, and another stronger print could boost the Greenback. That suggests importers should take advantage of any inflation fuelled upside in Kiwi pairs today.

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