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Currency Market Analysis

Sep 16, 2020 | Currency Market Analysis

Global Themes

Kiwi nervously awaits Fed

• Upbeat Chinese data helps Antipodeans
• The market needs a dovish Fed
• Aussie Dollar set for a breather?

Upbeat Chinese data helps AUD, NZD

A string of Chinese data beats yesterday afternoon helped both the Aussie and Kiwi Dollars back within 1% of their 2020 highs late yesterday. August industrial production was up 5.6% YoY, annualized retail sales turned positive for the first time in 2020, and fixed asset investment was only down -0.3% YoY. The positive slew of data is adding to hopes that China can help lead the world out of the post-COVID economic slump that it currently finds itself in.

As a result USD/CNH marked its lowest level since April 2019, as a recent trend in Yuan strength continued. And technical analysts will note the pair also traded below its 200 week moving average for the first time since June 2018, perhaps a sign that further strength in the offshore Yuan (CNH) may lie ahead. A stronger Yuan no doubt helped dairy prices climb 3.6% at the latest auction overnight. That’s the first rise in 4 auctions. The rise in industrial production is also a plus for iron ore purchases, given a stronger CNH makes commodity purchases cheaper for local Chinese buyers. NZD/CNH on the other hand is now off 3% versus its highs, and threatens a larger move lower.

The market needs a dovish Fed

Stock indices turned at key levels last night, led by Apple shares heading lower after they unveiled a new watch and fitness subscription. After beginning the day with decent gains equities are now rather flat on the day. Technically charts suggest a possible shooting star pattern on the S&P 500, another sign that stocks are going to want (and perhaps need) a continuation in dovish Fed rhetoric to keep the record buoyancy afloat.

And that is the risk for Kiwi pairs as we head into the back half of this week, that the Federal Reserve fails to sufficiently add to its alphabet soup of measures, after recently unveiling its new average inflation targeting measure. Ideally the market will be looking for some forward guidance around a timeframe or employment rate at which the Fed may consider raising rates, not that this will be any time soon - but just to reiterate that rates will staying lower for that ever bit longer. Any sign however that they are happy with the status quo might remove the market’s security blanket, leading to a fresh focus on Presidential election uncertainty and be a drain on risk instruments, commodities and risk related currencies such as the NZD and AUD.

Aussie Dollar set for a breather?

Across the ditch and the recent Reserve Bank of Australia minutes indicated a subtle inflection point in their recent outlook. While the Board reiterated that it would maintain highly accommodative settings for some time, it did state that it will continue to examine how further monetary measures could support the recovery. The Board also noted a lower AUD would provide more assistance to the economic recovery, its first real mention of the currency for a number of months.

Dr Shane Oliver, who is the Head of Investment Strategy at Australia’s largest fund manager AMP, yesterday responded to the RBA minutes by suggesting they continue to see a cut in the cash rate to around 0.1%, and more definitive QE/bond buying. Dr Oliver has had more success in forecasting RBA policy than the Reserve Bank themselves in recent times so when he gives his opinion we tend to listen. Overall while we may maintain a longer term negative bias on NZD/AUD, if RBA policies converge closer to the more negative RBNZ then that could change the short term game for exporters, who subsequently may want to add to their hedging profile in the 0.90-0.92 zone.

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