Continuing to claw back some recent losses against the USD and GBP, the NZD performed strongly at the back end of this week as GDP data showed positive growth and Central Banks continue to toy with more rate cuts. While the GDP figures were slightly higher than market expectations, there are signs of slowing in the NZ economy, lending weight to more possible rate cuts by the RBNZ in the upcoming months, but likely not until August.
That being said, today 1 NZD will buy you:
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GDP comes in as expected, RBNZ likely to take a wait and see approach to rate cuts
Data released yesterday showed the New Zealand economy expanded by 0.6% in the March quarter, which was in line with market forecasts. With the Reserve Bank’s forecast for growth lowered earlier this year, the stronger than expected GDP results should allow the RBNZ to take a wait and see approach with no urgency to cut rates to stimulate the economy.
The NZ GDP results coupled with a dovish Federal Reserve resulted in a short term boost for the NZD against the USD and GBP, but US growth is expected to outperform NZ, and many analysts are predicting a move back down unless forthcoming data shows a boost for the NZ economy.
Next week the RBNZ is scheduled to publish their thoughts on domestic and international economic outlooks, the risks facing the economy short-term and give a more detailed outline of the policy options available. This will give a clearer insight into how the RBNZ is expected to move in the upcoming months and will likely have a bearing on the performance of the NZD.
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Interest rates, politics on hold as two Conservative Party candidates remain
It’s been a busy week in more ways than one in the UK. For starters, the race to replace Theresa May as Conservative Party leader has narrowed to the final two candidates – Boris Johnson and Jeremy Hunt. Fears of a No-Deal Brexit have allayed slightly as Johnson’s usual harsh Brexit talk softened a little this week as he distanced himself slightly from the potentially disruptive option. While the possibility of a hard Brexit remains, with the Conservative Party elections heading to the background it will not be as in your face, and the GBP will be hoping not as disruptive as it has been.
At the Bank of England this week there were no calls to join Australia and New Zealand in dropping interest rates as UK inflation data and household income held in the region hoped for by the Central Bank. Business investment is still weak as companies grapple with the Brexit situation, however, if a smooth Brexit process eventuates and trade tensions ease, the Bank of England may even raise interest rates.
Contrast this with the European Central Bank president, Mario Draghi’s remarks that “additional stimulus will be required” unless there is an improvement in a range of risks such as “geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets” and you still have plenty of uncertainties in the region to deal with.
On the back of the UK decision and less Brexit drama, the NZD rose a touch against the GBP, and with several upcoming data releases, short-term performance against the GBP is dependent on more positive information.
USD softens as Federal Reserve holds rates steady but hints at future cuts
The US Dollar remained on the defensive against most major currencies, losing ground to the NZD yesterday after Wednesday's dovish Federal Reserve statement, suggesting that the US central bank could ease monetary policy in the short-term. The Federal Reserve stated that uncertainties have increased and inflation pressure has eased, leading to a large drop US Treasury bond yields and further downward pressure on the greenback.
The statement said that “uncertainties” had increased, particularly trade tensions with China. With the G20 summit fast approaching, all eyes will be on the Trump-Xi dynamic in the hopes for a more positive trading environment.
Further complicating matters is the Trump-Federal Reserve dynamic, with the President being clear that he wants to see interest rates drop. The Federal Reserve’s short-term moves could trigger a confrontation between Federal Reserve Chairman Jerome Powell and Trump, as speculation is growing that Trump is not Powell’s biggest fan. Asked this week whether the President was considering demoting the Fed Chairman, he stated “let’s see what he does” is relation to dropping interest rates. Yikes.
Further putting pressure on the USD this week are escalating tensions in Iran, as both parties up the tough talk and a military confrontation begins to look more likely.
With a rapidly growing number of issues on its plate, the next few weeks are critical to the performance of the NZD/USD as markets digest each bit of news and try to make sense of the growing uncertainty. The positive for the NZD is that a dovish Federal Reserve is offsetting the dovishness of our own RBNZ which might help offset any softer data to help the NZD in the short-term.
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