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Currency Market Analysis

Sep 17, 2020 | Currency Market Analysis

Global Themes

Four more years

• Fed projects rates near zero until 2024
• NZ Government’s PREFU more upbeat
• Local GDP eyed, Aussie jobs in the gun

Fed projects rates near zero until 2024

“Very powerful forward guidance” was the key message from the Federal Reserve this morning, but in reality they changed very little at all. On the positive side they suggested that economic activity and employment has overall improved in recent months, and that household spending has now recovered 75% of its COVID-related decline. In lieu of that they reiterated that their current policy stance is appropriate, but underlined that rates are likely to remain at current levels for another four years into 2024.

In the short term the Fed’s forecast upgrades and the lack of additional support for the economy have denied markets the fuel they so desperately craved for another leg higher in stocks, commodities and risk currencies. But looking into 2023, a forecast for 4.0% unemployment, 2.0% core consumer price inflation, while maintaining a projection of near zero interest rates tells you all you need to know. The Federal Reserve are now committed to allowing their economy to overheat before they even consider withdrawing the current record amount of stimulus. For now pre-election uncertainty and a stagnant Fed can provide the US Dollar with much needed support, but with the long term trend now in favour of Dollar weakness exporters should look to take full advantage of any pullback in risk sentiment and NZD/USD in the months ahead, before the weak Dollar narrative returns in full force in 2021.

NZ Government’s PREFU more upbeat

Four more years was also the theme of the NZ Government’s Pre-Election Economic Fiscal Update (PREFU) provided yesterday. While Treasury is forecasting near term growth to be less negative than it thought at the May budget, it sees “economic scarring” as potentially lasting into 2024, by which point New Zealand should eventually return to its long term growth trend. Overall the Treasury sees growth averaging at 2.8% out until 2024, compared to its pre-COVID March forecast for 3.9%. The other key takeaway from the PREFU was that Treasury now see unemployment peaking lower (at 7.8%) but later in the March 2022 quarter, presumably after the extreme fiscal and monetary stimulus wears off.

Continuing with the theme of positivity local balance of payments data released yesterday returned its largest seasonally adjusted current account surplus since 1971. The cause, mainly being a decline in imports, down $3.2B (or 21%) to $12.5B, is perhaps not so positive, but the fact that exports only dropped 5.2% ($812M) is emblematic of how New Zealand has held up through extreme pressure. And that is despite our international tourism and education sectors being almost non-existent. On a trade basis however it definitely shows there has been a far greater propensity to purchase NZD through the June quarter than sell it, and no doubt that helped support the 8.4% rally in NZD/USD through the June quarter.

Local GDP eyed, Aussie jobs in the gun

Super Thursday in markets continues today with the release of our local GDP. The Treasury forecast a drop of 16% in its PREFU yesterday. Bloomberg analysts are looking for a higher print around –8%. We think the answer might lie somewhere in between at –11%, and while being rather dated now the release could still present a risk to Kiwi pairs.

Later today we get the latest bout of Australian jobs. A contraction of around 40K jobs is expected with the unemployment rate rising to 7.7%. If expectations are met that could provide further pressure on the Aussie Dollar and the RBA to have a rethink on maintaining its current stance. That’s followed by decisions from both the Bank of Japan and Bank of England today, the latter of which must present as a risk for the Brexit-ravaged Pound. And just in case that wasn’t enough we also get European inflation. Without doubt we will have a clearer idea of the month ahead for currency pairs by this time tomorrow.

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