After a disappointing end to last week, this week brought renewed hope and upward pressure to the value of the Kiwi dollar, increasing its value against all major currency crosses since this time last week.
What has impacted the Kiwi Dollar this week?
US-China Trade War
Finally, after a year of back and forth, the US and China have agreed on a phase one, interim trade deal. Yay!
On Wednesday, Trump’s administration released a 94-page document that outlines the terms of the agreement. We won’t bore you with all 94 pages worth of detail. Instead, the contract can be summarised with the following:
China has agreed to purchase an extra US$200 billion worth of US products and services over the next two years.
China will be more transparent about government interventions that affect the strength of the Chinese Yuan. They are kinda already expected to do this by the International Monetary Fund, so hopefully, this agreement really makes them follow through.
Intellectual property protections have been strengthened, particularly in pharmaceuticals and technology.
The proof of a deal has improved global market sentiment, which is always good news for the Kiwi dollar that thrives in risk-on markets.
With phase one of the deal now signed, negotiators will look to begin phase two. At this stage, markets feel phase two will be even more complicated than phase one, so we may as well settle in for another year of negotiations.
US domestic data
Overnight the USD outperformed off the back of robust domestic data. The Federal Open Market Committee (Fed) business outlook survey rose to 17.0 in January, up from 2.4 in December. Further to this, December retail sales rose 0.3% MoM and jobless claims for week end January 11 fell to 204k vs 214k the week before.
All of this data is good news for the American economy and, unfortunately, put a cap on the Kiwi dollar’s growth.
This data, coupled with the trade agreement, has put foreign exchange volatility at a historical low. It seems geopolitical concerns have led to some zombie-like trading, especially because politics are dominating headlines but aren’t creating major foreign exchange trends.
There hasn’t been much movement as a result of Brexit this week, which is still expected to take place by the end of January.
Headlines haven’t been great for Boris Johnson though, as the EU Commissioner for trade has said that it is simply not possible for the EU and UK to reach a comprehensive trade deal by the end of 2020. This comes after Johnson spruced it was “epically likely”.
In other interesting news, it seems Brexit has cost almost the same as what the UK has paid to the EU over the past 47 years. The UK’s total contribution to the EU is around 215 billion pounds when adjusted for inflation. Markets expect that by the close of 2020 Brexit procedures would have cost the UK 200 billion pounds. If that figure doesn’t sting enough, the extra 200 billion pounds is the equivalent of 3% growth in the British economy.
Long story short - the UK is 200 billion pounds down, and their economy is 3% weaker than it otherwise would have been if the Brexit referendum didn’t occur.
In New Zealand
The NZD had a cracking day yesterday, outperforming most major currencies after the New Zealand national house price index data was released showing a rise by 1.2% in December, bringing the annual figure to 6.6%. The cherry on top was housing sales surging to 12.3% annually. This is welcome news for the Kiwi economy and NZD, and is reducing the chances of an interest rate cut in the February Reserve Bank of NZ meeting.
Moving forward, the foreign exchange market will take its cues from domestic and Aussie data as their relative banks make interest rate decisions; in addition to keeping an eye on Chinese and US geopolitical developments.
As we close out the week, the Kiwi dollar will take some guidance from Chinese Q4 GDP data released later today. Markets expect GDP growth to remain at 6.0% year on year in Q4. If this figure comes in under expectations, it could spell bad news for the value of our NZD.
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