TGIF everyone. Before we begin, I'll take this chance to remind you that Valentine's Day is next Friday. If you want to load up on brownie points, get in and book that restaurant now. With that out of the way, let's chat about the Kiwi dollar’s performance after its abysmal fall last week. While the value of the NZD has improved since we last spoke on Friday, it is still witnessing some downward pressure as a result of strength in the USD, and the ongoing concerns stemming from the Coronavirus.
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What impacted the Kiwi dollar this week?
Coronavirus Concerns and China
Earlier in the week, Bloomberg reported that the Chinese government had started clinical trials on Coronavirus drugs. This comes alongside the growing evidence surrounding the Coronavirus' impact on global manufacturing supply chains and tourism. So far, the following changes have been made as a result of the Wuhan virus:
- Korean car manufacturer Hyundai has shut some production locations
- Tesla and Airbus have closed their Chinese factories
- Starbucks has closed its doors on stores in China and Hong Kong
- Several airlines have stopped or limited flights bound in or out of China and Hong Kong
New Zealand is a top-rated destination for Chinese tourists. As the virus continues to quell flights and outbound travel for the Chinese population, there could very well be a noticeable impact on the New Zealand tourism industry. Further, our economy is intrinsically linked to China due to our strong trade ties, so any significant dents in Chinese economic growth can carry through to the value of the Kiwi dollar. Today China is releasing their January trade balance figures, which will be our first glimpse into the impact of the virus on their economy.
Virus aside, the Chinese government announced they are halving the tariff rate on US$75bn worth of imports from the USA on February 14th. Now that's a lovely Valentine's day gesture! This decision will boost the Chinese economy as they won't need to pay as much tax, will help the US economy as they can export more to China, and will helpfully lessen the blow of the Coronavirus. Fingers crossed!
The USD reached its February high this week as financial markets rebounded from last week's drop. Markets are now waiting for the January Non-Farm payrolls report to be released, and expect it to be similar to the month before. If the data is above estimates, the USD will receive even more support, further pushing down on the value of the Kiwi dollar. Should it be lower than expectations, the opposite will occur in favour of the NZD.
Today the Reserve Bank of New Zealand is releasing their two-year inflation expectations survey. The current inflation target is 2% over the medium-term, and markets expect the survey to show expectations of 1.8%, which is well on the way to the goal. Should this be the case, it is less likely the RBNZ will cut interest rates during their next meeting - a good sign for the value of the NZD. Currently, markets are pricing a 4% chance that interest rates will be cut during their meeting on February 12th, with a 25% chance in May. Coronavirus developments will play into these decisions, so it's worth keeping an eye on the news if you plan on travelling and exchange NZD soon.
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