Wednesday, August 7, 2019

Has New Zealand started a currency war? An unexpected rate cut sees AUD and NZD slump

  • Dollar

Market recap: A trend of global rate cuts has begun

NZD/USD slipped to a year low, breaking 0.64’s level this morning, after a bigger-than-expected interest rate cut by the Reserve Bank of New Zealand (RBNZ). Most investors and economists had already predicted RBNZ policymakers would cut rates by 25bps this morning but, as usual, the market is always full of surprises. After a rate cut of 25bps in May, RBNZ announced it would lower its official cash rate (OCR) by 50 bps to 1%. In addition, the RBNZ projected the OCR will be at 1.21% in December 2019 and 0.91% in December 2020, which means the RBNZ is going to cut the rate further this year and next.

The RBNZ’s monetary policy statement delivered a strong dovish tone to the global economy’s outlook and future policy decisions, stating: “The Monetary Policy Committee agrees that a lower OCR is necessary to continue to meet its employment and inflation objectives. The global economic outlook has weakened and the lower OCR path reflects the economic projections and the balance of risks discussed.”

Meanwhile in Australia, the Reserve Bank of Australia (RBA) also announced its monetary policy decision yesterday morning, holding its cash rate at a record low 1% as RBA’s governor Philip Lower also highlighted increased uncertainty surrounding the global economy. Although RBA did not launch a further rate cut yesterday, the RBA’s acknowledgement means there’s also a dovish tone regarding the future of Australia’s monetary policy. Lower mentioned that the RBA expects inflation to miss the previous forecast of 2% and the country’s GDP projection of 2019 has dropped to 2.5%, down from the previous figure of 2.75%.

RBA and RBNZ’s rate cut 2014-2019

The Chinese yuan has a strong, direct influence on the Aussie and Kiwi, and its midpoint has been set at 6.996 per dollar this morning by the People’s Bank of China, slightly stronger than the 7-yuan-per-dollar level, and just two days after the US labelled China a currency manipulator. The PBOC’s move to stabilize the yuan has provided relief after much fear and overreaction from the market early this week, and the dollar had its first gain after four days of losses. The Chinese government has confirmed the country has officially stopped buying US agricultural products, while the White House hinted yesterday they still expect to meet with Chinese negotiators in September. Wall Street closed after rising from 1.2% to 1.4% yesterday.

Today’s analysis:
The future of AUD, NZD and China’s yuan are strongly influenced by the trade war

Australia and New Zealand’s economies are impacted by China, as the two countries export many goods to the Asian superpower (such as coal and iron ore). This means their central banks have to be mindful of China’s economic outlook and how the yuan trends if they want to maintain a positive return and demand from China to help grow their economies.

At the moment, there’s no short-term end in sight to the ongoing trade war, and a new deal this year also isn’t likely. With more exports from China likely to be added to the tariff, the yuan will still most likely break down over the vital 7-yuan-per-dollar level this year, even though the PBOC has claimed it won’t keep falling. Usually, when a vital support level has been broken, a currency will drop further. In this case, it is expected that both RBA and RBNZ may need to lower their rates one or two more times this year. AUD/USD and NZD/USD are expected to slump further to new, year lows in the mid-long term.

China’s trading statistics, including trade balance, imports and exports rate, will be announced tomorrow, and these are likely to provide more hints on how the yuan will trend in the short term. Market consensus is that these figures will be weaker than before, and if that’s the case, the yuan may drop further down to 7.14 level.