New Zealand dollar may look past CPI, focus on stocks, USD and Fed
NZD fundamental outlook still remains bearish
Despite an aggressive global market selloff, in which the S&P 500 was on course to deliver its worst weekly performance (as much as -5.44%) since March, the ‘anti-risk’ New Zealand Dollar (and the Australian Dollar) generally appreciated. Under normal situations, one would expect the yields in which these currencies enjoy to work against them as carry trades are unwound amidst investors prioritizing preserving capital.
But thanks to rising interest rates from the Fed, the US Dollar now plays two important rolls in trading. First, it holds the highest yield. Second, it is the world’s reserve currency. It seems as though the former attribute adversely impacted USD as 2019 rate hike bets were also diminished. Thus, perhaps traders sold the greenback and this came as a benefit to the New Zealand Dollar, and other commodity bloc currencies.
Risk trends and market mood seem to be poised on being a primary driver for the New Zealand Dollar given the surge in volatility. But let us briefly dive into the monetary policy fundamentals as NZD is also awaiting a local CPI report. New Zealand third quarter CPI is expected to pick up pace and clock in at 1.7% y/y from 1.5%. The quarter-over-quarter inflation reading is also expected to tick up to 0.7% from 0.4%.
The former would be the fastest pace of price gains in one year while the latter would be the most since the first quarter of 2017. Reserve Bank of New Zealand rate cut bets have been somewhat diminishing lately, overnight index swaps are now pricing in only a 11.2% chance of a cut in March. Given that local economic news flow has been tending to outperform as of recently, this may open the door to an upside surprise.
Such an outcome, which would be in line with RBNZ inflation expectations, could further reduce those dovish monetary policy expectations. This would bolster the New Zealand Dollar and could make it more likely that the central bank begins slowly stepping away from a mixed outlook on where rates could go next. Any hints leading to this direction would be considered a relatively hawkish shift.
But given the volatility in stock markets, especially if the selloff lingers, this may only offer temporary gains. There are numerous risks from the external front ranging from emerging markets to trade wars. In addition, the Fed may continue promoting the case for rate hikes in the week ahead considering that a local market correction seems to have been largely overdue in their projections.
With that in mind, keep an eye out for commentary from St Louis Fed President James Bullard, Governor Lael Brainard and Dallas Fed President Robert Kaplan. They may continue reiterating the case for gradual rate hikes which could reignite the US Dollar, risking paring the gains seen in the New Zealand Dollar. The NZD fundamental outlook still remains bearish.
As concerns crop up about the state of the US economy and whether or not the Federal Reserve may be tightening policy too quickly, upcoming retail sales figures and September FOMC meeting minutes will generate volatility across USD-pairs on Monday and Wednesday, respectively.
Rising interest rates have sparked weakness in equity markets across the globe this week, and more signs that inflation is heating up could reignite another wave of higher yields in developed economies.
Consumption is the most important part of the US economy, generating nearly 70% of the headline GDP figure. The best monthly insight we have into consumption trends in the US might arguably be the Advance Retail Sales report. In September, according to a Bloomberg News survey, consumption slumped with the headline Advance Retail Sales due in at +0.6% from +0.1% (m/m). Conversely, the Retail Sales Control Group, the input used to calculate GDP, is due in at +0.4% from +0.1% (m/m). Given the backdrop of events otherwise, we don’t expect the retail sales report to have a significant impact, at least this time around.
Market moves so far have shown that GBP tends to strengthen when the possibility of a “soft” Brexit increases and weaken when a “hard” or “cliff-edge” becomes more likely. The FTSE 100 index of the major London-listed stocks has tended to move inversely to the Pound, rising when GBP falls and vice versa, although there is no guarantee this will last.
Therefore, if the softer alternatives at the top of the table become more plausible, GBP would likely strengthen and London shares weaken. In the case of the harder alternatives at the bottom of the table – particularly the WTO-rules no-deal outcome – GBP would likely decline and London shares advance.
The UK remains in the EU, perhaps after a proposed deal is rejected by the Westminster Parliament, a second referendum or “people’s vote” is held and the British electorate reverses its previous decision to leave. A capitulation by the EU, allowing the UK to leave but keep most of the benefits of membership, is possible but highly unlikely.
Depending on market sentiment at the time, a decision to remain in the EU or leave on highly attractive terms could potentially lift GBPUSD back to levels around 1.4300, where it traded before the result of the June 23, 2016 referendum was announced.
For more information please visit www.swissfs.com