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Currency Market Analysis

Sep 18, 2020 | Currency Market Analysis

Global Themes

The recession we had to have

• NZ economy shrinks 12.2% in Q2
• Market mixed on the Fed
• Bank of England edges closer to the negative

NZ economy shrinks 12.2% in Q2

Well positioned but not positioned well. That’s our oxymoronic take on this week’s economic data out of New Zealand. Yesterday Stats NZ reported a 12.2% fall in GDP through the June quarter, confirming our first recession in a decade. On a global scale we fared worse when compared to Australia (-7%) and the US (-9.1%) but came out looking better than Europe (-12.4% average to date) and the UK (-20.4%).

Finance Minister Grant Robertson yesterday defended the Government’s decision to “go hard and early”, and suggested the country is now set up to rebound stronger than most developed nations. And to borrow a phrase from former Australian Prime Minister Paul Keating this was in many ways “the recession we had to have”. Of course the political debate will ensue in the lead up to the election about whether the government’s response was adequate, but as the Finance Minister pointed out yesterday the statistics ignore the health benefits gained by imposing severe lockdown restrictions across the country though Q2. From a currency point of view there was a mild reaction in Kiwi pairs to the data, but the focus now will firmly be on the strength of the rebound and how quickly we can return to relative normality. If (or when) borders reopen it does seem we may fare better than most.

Market mixed on the Fed

It’s been a mixed bag over the last 24 hours as markets wrangle over the fallout from the latest Federal Reserve decision. In the longer term the combined prediction of 4% unemployment, 2% inflation and interest rates at 0-0.25% in 2023 exacerbate the negative yield story in the US, and weigh on the US Dollar. But then a look at gold and stocks this morning show both lower, and perhaps a predication to focus on the lack of further Fed stimulus in the near term.

Over to currency markets, and after a sustained sell off in the NZD and AUD yesterday both pairs have recovered all of those gains overnight. Oil is up, the Volatility Index is up (VIX) and the US 10 year TIPS rate (symbolic of real yields) is down. A strong Aussie jobs print yesterday, coupled with a fall in their unemployment rate to 6.8% can help to explain the residual strength in the Aussie Dollar, but then we see a higher NZD/AUD today, which has largely fuelled NZD outperformance overnight. Confused? Well so are we. Let’s just say USD buyers should take advantage today of a what at best seems like a technical move back towards the 2020 high.

Bank of England edges closer to the negative

The other big mover overnight was NZD/GBP as the Bank of England suggested the Monetary Policy Committee has been briefed on “how a negative bank rate could be implemented effectively”. As per our own RBNZ this had a dampening effect on the currency and despite comments from the EU’s Von Der Leyen that a EU-UK trade deal was still possible Sterling largely underperformed overnight. With a hard Brexit still on the table, the Bank of England considering negative rates, and a 20%+ contraction in the June quarter to boot it is of little wonder NZD/GBP is close to 1 year highs today.

After a heavy last 24 hours of event risk tonight brings relative calm, with US consumer sentiment data being the main focus. Attention will also move back to the US stimulus package debate, where President Trump has suggested he wants a much larger package to be approved prior to the election, albeit after Republican Senators have attempted to water down previous Democrat submissions. We will take a closer look at both local and US politics next week and what impact it may have on currency markets. Until then enjoy the weekend.

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