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Currency Market Analysis

Jan 14, 2020 | Currency Market Analysis

Global Themes

Global easing bias remains

  • Central banks still likely to cut rates in 2020
  • NZD/GBP nears 3 month highs
  • “Phase One” trade agreement, US data ahead

Central banks still likely to cut rates in 2020

Hands up who can name a central bank likely to hike rates in 2020? There might be a few contrarians out there naming some obscure far flung banks, but amongst the majors it looks like the race to the bottom on global interest rates is still very much alive. The Reserve Bank of Australia are at coin flip odds of a cut at their next meeting as the economic cost to the bushfire inferno keeps piling up. Traders also have bets that the Bank of Canada may ease this year from their lofty 1.75% benchmark rate. Bank of England committee member Gertjan Vlieghe joined the party when he suggested over the weekend that if data doesn’t improve they may look at cutting sooner rather than later. And we’d suggest that the Federal Reserve and our very own RBNZ are still more likely to cut than raise rates this year.

For all the talk of a global reflation as we head into 2020 that’s a clear sign that central bankers remain unconvinced about any meaningful recovery. And ultimately that’s a good reason to be cautious about any significant NZD rallies. Sure stock markets are setting fresh all time highs, but that says more about money supply and the return on cash than the state of the world economy. And clearly a more stimulatory stance from central banks through the 2010s has worked. A low inflation slow growth environment has hardly been the worst outcome, and nor for that matter is a New Zealand Dollar that hovers in a 0.64-0.68 cent range as a result of its depressed yield.

NZD/GBP nears 3 month highs

Aside from the comments from the BoE’s Vlieghe over the weekend we also saw some weakness in UK data overnight, with a 0.3% contraction in November’s GDP accompanied by a 1.7% fall in manufacturing production for the same month. Bearing in mind that this data still captures some of the pre-election uncertainty that would have plagued UK businesses, it’s still a pretty average print. A 25 basis point cut by the Bank of England by September is now fully priced into markets, and subsequently NZD/GBP rose another 0.5% overnight to be back near 3 month highs.

The data is emblematic of what is likely to be another rough ride ahead for Sterling in 2020. In the long term we expect a decent Pound recovery but we can’t see that happening until some economic certainty around Brexit and subsequent fresh trade agreements is provided. That will take some time, and despite UK Prime Minister Boris Johnson’s assurances that all will be well in a post-Brexit world we are seeing sustained Pound weakness for the first half of this year and that can keep NZD/GBP elevated above the 0.50 zone. In the long run a weak Pound won’t be such a bad thing for the UK either, helping both exporters and the tourism sector as we head into the UK summer.

“Phase One” trade agreement, US data ahead

The USA is in focus this week with “Phase One” of the US/China trade agreement set to be signed this weekend. That’s helping risk sentiment this week and pushing NZD/JPY back towards 9 month highs. Beware a letdown In this pair if the facts don’t meet the hype. US inflation (tonight) and retail sales (Thursday night) can also help the US Dollar if they come in stronger.

The other side of the trade equation is China, and they have GDP data due Friday. USD/CNH is at its lowest since July today and that’s seeing NZD/CNH also head lower this month. Locally we have the NZIER quarterly business confidence survey due this morning, as well as building consents data, although we’d be surprised if either are major market movers.

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