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Currency Market Analysis

Oct 17, 2019 | Currency Market Analysis

Global Themes

RBNZ signals lower rates ahead

Headline NZ September quarter inflation came in at a robust 0.7% yesterday, beating analysts’ expectations, albeit falling slightly short of our own forecast. The print takes the annualised increase to 1.5%, but leaves the RBNZ’s preferred core inflation measure (sectoral factor model) at 1.7%. Non-tradable inflation was particularly strong at 1.1% QoQ, while the tradable component only increased by 0.1%. That’s a clear sign that importers are absorbing the lower currency into decreased margin, or able to keep their prices virtue of residual FX hedging undertaken earlier in the year. We highly doubt that behaviour will persist and expect price adjustments to contribute to a stronger tradable print this quarter.

Nonetheless that saw the conundrum of the strongest quarterly price increase in a year still finishing with the weakest annualised print in 18 months, largely due to anaemic prints in the December and March quarters when the NZD was much higher. Clearly the number wasn’t strong enough for the RBNZ to reconsider an expected rate cut despite it beating their own 1.3% forecast, as Deputy Governor Geoff Bascand hit the wires post release to suggest a lower rate may still be needed to achieve policy objectives. Those comments quickly saw the half percent rally in NZD/USD erased, and it now seems pretty clear we will be getting a 25 basis points cut to the record low of 0.75% when the RBNZ next meet on November 13. That’s unlikely to be supportive for Kiwi pairs as we near that meeting.

China threatens retaliation against pro-HK bill

An additional reason for the slide lower in NZD yesterday was the passing of a bill through the US House of Representatives supporting the Hong Kong protest movement. The bill achieved bipartisan support, and throws an extra spanner into “Phase One” of the US/China talks. For its part the Chinese Foreign Ministry threatened retaliation and that sent both NZD/USD and NZD/JPY significantly lower late yesterday.

President Trump has steered well clear of Hong Kong, signalling to China it is a domestic issue which is up to them to solve. But yesterday’s bill highlights the recent shift amongst the Democrats to support a tougher stance on China, and politically that places Trump in a bit of a bind. He must stay tough on China himself to maintain his electorate, but at the same time that risks an escalation in the trade wars and tariffs, which can have a detrimental effect on US stock markets and the economy as a whole. A reduction in tariffs and a weaker currency might be his only way out, but he’ll need to achieve some concessions from China in order to sell this to the American public.

US retail sales tank

To complete the Kiwi’s roller coaster overnight US retail sales weakened the Greenback, as they plummeted by 0.3% in September. That’s the first decline in seven months, and despite some one off hurricane related misses, it raises the prospect that increased tariffs are finally having an impact on the US consumer’s behaviour. Fed pricing for an October 31 rate cut leapt to 88%. That saw NZD/USD rebound half a percent from its lows, and ironically end yesterday’s roller coaster ride back where it started.

Looking ahead to today, the major release is the September jobs number for Australia. A gain of approximately 15K jobs and a steady unemployment rate of 5.3% is expected. A weaker print could give the RBA food for thought on another rate cut this year and see an uptick in NZD/AUD. Tonight we get US industrial production, plus more Fedspeak before they enter their blackout window ahead of that key rate decision on October 31.

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