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Currency Market Analysis

Jan 20, 2020 | Currency Market Analysis

Global Themes

Getting back to economics

• Political risk recedes, focus on data
• Inflation pivotal this week
• White House plans to juice the stock market

Political risk recedes, focus on data

The two big political risks of 2019 seemed to have finally reached a conclusion this month. “Phase One” of the US/China trade deal was signed last week, while Britain will be leaving the European Union on January 31. Of course the latter is more final then the former, but the removal of both issues in the near term has left the market in a vacuum, waiting for fresh direction. And that’s likely to see markets return to economic fundamentals: data points, the relative return on respective currencies, and the likely path of interest rates in the future.

This week we hear from three central banks in Japan (Tuesday), Canada (Wednesday night) and the EU (Thursday night). We also get key inflation data locally (Friday) and Australian unemployment (Thursday). Underpinning all of this remains the fact that the most liquid currency in the world (the US Dollar) still offers the highest rate of return, while US stock markets continue to make fresh record highs. With bonds, stocks and gold all bizarrely attracting demand at once it seems that there is what HSBC’s David Bloom calls a “barbell strategy” going on in markets: let’s keep chasing risk higher on one hand, but on the other let’s hedge some of that risk in case it all turns to custard. That seems to be a market unconvinced by its own dynamic, and makes us suspect that the recent rally in risk and the NZD might be due for a breather soon.

Inflation pivotal this week

Headlining those data releases this week is local consumer price inflation due this Friday. The print is for the December quarter but will undoubtedly be watched closely by the RBNZ ahead of their February 12 meeting. The median expectation is for a 0.4% uptick on the quarter which would nudge the annualised increase up to 1.8%. ASB economists have suggested that the number may provide a “modest upward surprise” to the RBNZ based on a stronger tradable inflation component. ANZ are on a similar page, looking for annualised inflation to hit 1.9%, up from 1.5% in Q3 and well above the RBNZ’s own forecast at 1.6%.

Late last week we noted a significant contraction in food prices through November and December, which constitutes approximately 20% of the overall number. Furthermore export prices in December fell for the first time since July, while last Friday the December Business NZ manufacturing index fell back into contraction territory, following on from a similar contraction in electronic card spending. Without doubt business sentiment and house prices have improved but with a stronger NZ trade weighted index through the second half of Q4 we are worried that tradable inflation won’t be as strong as the major banks expect, and some of the above data softness leave us similarly concerned about a weaker non-tradable component. That could lead to a CPI read closer to the Reserve Bank’s own forecast around 1.6%, and ultimately that’s another risk for New Zealand Dollar pairs.

White House plans to juice the stock market

In another sign that the recent rally in stocks is becoming a little unbelievable Fox News leaked a story on Friday night that suggested the Trump administration are looking at further ways to “juice the stock market” ahead of the November Presidential election. The talk is of increasing earned income tax credits for low and middle income earners, with the additional possibility of further corporate and individual tax cuts. Of course such measures would have to pass through the House of Representatives where the Democrats now hold a majority, but it’s a sign that the White House aren’t confident that stocks can hold or better their current levels without more stimulus.

We noted on Friday that Kiwi pairs are now going to need something more than the US/China trade deal to push significantly higher. A new risk on move prompted by further US stimulus could do the trick, as could a higher inflation print here, but we don’t think we’re going to get either in the immediate. On Friday a significant increase in new housing starts out of the US put the Dollar on the front foot and we’re now wary a break of 0.6570 in NZD/USD could ultimately lead us much lower into the end of January, particularly if inflation is on the softer side come Friday.

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