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Currency Market Analysis

Jan 16, 2020 | Currency Market Analysis

Global Themes

US, China finally sign “Phase One” deal

• Is a trade deal really good news for the Kiwi?
• UK inflation softens, rate cut in sight
• Chinese imports surge in December

Is a trade deal really good news for the Kiwi?

The US and China finally put pen to paper on “Phase One” of their trade deal less than an hour ago. The agreement prohibits misappropriation of trade secrets through electronic surveillance, requires forfeiture of machinery that produce counterfeit goods, but most importantly details plans for China to increase its purchases of US goods by $200B over 2017 levels over the next two years. For their part the US have aborted the planned December tariffs and rolled back the tax rate on some of the September tariffs, plus removed their labelling of China as a “currency manipulator”. Risk instruments have got a boost from the signing, with stocks surging back towards all time highs, and both NZD/JPY and NZD/USD getting a small uptick on the signing.

But is this really all good news for the NZD? Sure we are a small open trade based economy so any sniff of global protectionism has us reaching for the adult diapers. But as analysts at Capital Economics pointed out earlier in the week “any step up in imports from the US as a result of the trade deal will probably come at the expense of imports from elsewhere”. Cue New Zealand and Australia. It’s hard to say yet if this will occur, or even if China will honour such lofty promises to the US in the months ahead, but if they do then by logic that is likely to see a reduced demand for NZ exports, and consequently a reduction in the real demand for NZD. That in itself is a net negative for the Kiwi when we head into winter.

UK inflation softens, rate cut in sight

To the UK, and inflation hit its lowest level since November 2016 when reported last night. Annualised CPI dropped to an anaemic 1.3%, and markets moved quickly to fully price in a rate cut by May. The next Bank of England meeting however is earmarked for Jan 30, and the market implied chances of a rate cut by then are now as high as 58% (source: Reuters). Earlier in the week Royal Bank of Scotland analysts predicted a cut at the upcoming meeting, while the Bank of England’s Michael Saunders warned of a low inflation trap last night, and suggested the bar to a an immediate cut had suddenly got a lot lower. That makes the Jan 30 meet a “live” decision.

Despite all of this NZD/GBP remained rather steady overnight. Our colleagues at the Commonwealth Bank joined RBS yesterday in calling for a January rate cut yesterday, and see GBP/USD down towards 1.27 as a result. Should that eventuate then we are likely to see another 1-2% upside in NZD/GBP from current levels, making 0.52 an optimistic but perhaps realistic near term target for Pound buyers.

Job ads, food prices fall

Returning to our local economy and food prices showed a 0.2% monthly contraction for December, following on from a steeper 0.7% in November. Given they make up approximately 20% of CPI that’s a warning bell for when Q4 inflation data is reported next Friday. Coupled with that weakness was also a report out from TradeMe Jobs yesterday that said job ads were down 10.6% in 2019 (from 2018 levels) on its site. They suggested the injection of government infrastructure spending could change the hiring mood but for now businesses that were weighing up new or replacement hires “will have to think about how confident they are about their ability to earn more money in the year ahead”. We’re pretty confident Governor Orr read this one. The next RBNZ meeting is on Feb 12.

The main focus today will be on the continued reaction to details of the US/China trade deal, however we do get US retail sales data tonight. A beat of expectations for a 0.3% gain in sales could see NZD/USD resume its 2020 downtrend, particularly now the hubris of “Phase One” is over.

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