Cratering business sentiment sees Kiwi trapped in bear channel

SINGAPORE: New Zealand’s dollar is set to take another leg down this week if key manufacturing data add to evidence business sentiment is deteriorating.

The kiwi has tumbled about 7% from its July high as worsening company confidence has added to slowing economic growth and weak job creation as a reason for the central bank to keep on cutting interest rates. The nation’s two-year bond yields have dropped to a succession of record lows.

Deteriorating economic conditions and the escalating Us-china trade war saw the Reserve Bank of New Zealand slash its benchmark by a greater-than-expected 50 basis points on Aug 7 to a record 1% and signalled further easing could be possible. Traders are fully pricing in another 25 basis point move at the central bank’s November meeting, and a further one by May next year.

The annual economic growth rate slowed to a five-year low of 2.1% in the second quarter, from 2.5% in the previous three months, the statistics department said Sept 19.

Business sentiment worsened further in August even after the super-sized rate cut, with the Anzsurvey of Business Confidence sliding to an 11-year low.

That’s an ominous sign for the Business New Zealand PMI Manufacturing Index due this Friday. The gauge has been in contractionary territory the last two months, and appears destined to stay there for the foreseeable future.

The relentless bad news has pummeled the kiwi, with the currency dropping to a four-year low of 62.04 US cents last week, down from July’s high of 67.91 US cents. A test of support at its August 2015 low of 61.30 US cents looks feasible in the near term, with a decline to 60 US cents possible over the longer term.

The currency has now been in a bear channel since early 2018 and seems destined to stay there as slow stochastics remain out of oversold territory.

Market positioning remains heavily negative. Leveraged funds held a net 12,053 contracts betting on further losses in the currency for the week ended Sept. 24, while asset managers owned 31,739, according to data from the Commodity Futures Trading Commission.

If this Friday’s PMI data shows further weakness, investors make take that as a sign at least two more rate cuts are needed, opening the New Zealand dollar to further losses. The median forecasts of analysts surveyed by Bloomberg is for the currency to end the year at 64 US cents, which is starting to appear far too optimistic. — Bloomberg