Tuesday, November 12, 2019

Sterling lifted by Brexit Party’s election comments; will the RBNZ cut rates again to push inflation?

  • Dollar
  • Gold
  • Euro
  • Stocks
  • Dow Jones
  • US Retail Sales

Market recap: Markets grow more cautious ahead of the US-China partial trade pact

US equities mostly slipped on Monday, after US President Donald Trump sent out mixed signals regarding the US-China trade dispute. Trump said on Saturday that talks with Beijing were progressing but that the US will only make a deal with China if it is the, “right deal”. He also claimed some reports about the US’ willingness to lift tariffs were incorrect. The DJIA inched 0.04% higher, the S&P 500 fell 0.20% and the Nasdaq lost 0.13% on the day. The Dollar Index retreated 0.16%.

Sterling advanced 0.63% against the dollar on Monday, after the UK’s Brexit Party said it will not contest Conservative seats during December’s General Election, but will instead target Labour and Liberal Democrat ones instead.

Meanwhile, safe haven assets ended the session mixed. Gold dropped for the third straight day, falling 0.22% to end Monday’s trading session at 1455.86. The yen gained 0.19% against the greenback.

Asian equities recovered slightly on Tuesday, with the Nikkei and Straits Times Index opening 0.02% and 0.33% higher in the morning. The Hang Seng Index opened 0.51% higher on Tuesday after a sharp drop on Monday, but retreated slightly as investors continue to show caution around the ongoing protests in the financial hub.
The UK’s labour market data will be released later today at 1.30pm (GMT +4).

Today’s analysis: New Zealand’s inflation and labour market continues to soften in Q3

The Reserve Bank of New Zealand (RBNZ) is set to reveal its monetary policy decision tomorrow at 5am (GMT +4) for the last time this year. At its August meeting, the central bank cut its interest rates by 50bps to 1.0% and RBNZ officials stated that inflation and employment are likely to ease in relation to its target, in the absence of additional monetary policy stimulus.

Since August, inflation and employment data has continued to ease (and relative to the central bank’s target rates). Inflation for Q3 grew 1.5% year-on-year, beating estimates of 1.4% but decreased further from the central bank’s target midpoint of 2% from Q2 (when inflation was 1.7%). Unemployment rose in Q3 to 4.2%, which was short of economists’ expectations of 4.1%. Average hourly earnings for Q3 also fell short of expectations, growing only 0.6% from the previous quarter instead of the expected 1%.

Recent economic data indicating a slowdown in New Zealand's economy

Global geopolitical risk continues to weigh on New Zealand as well. China’s economic slowdown and the US-China trade war are likely to put pressure on demand for New Zealand’s exports, as China, Australia and the US (New Zealand’s top three trading partners) account for 26.86%, 15.07% and 10.16% of New Zealand’s exports as of 2018 respectively. While trade tensions between the superpowers have eased over the past few weeks as the two countries progress towards a partial trade deal, the dispute is likely to continue for a prolonged period of time. This will most likely affect inflation and the New Zealand labour market, as businesses become more risk averse and hold back on investments.

Futures tracking the RBNZ’s interest rate decision suggest a 76.4% probability of a 25bps rate cut is priced into the market, up from 56.3% a week ago but down from 94% a month ago. If the RBNZ cuts rates, then NZD/USD may fall slightly past 0.6323’s level to range between 0.6289 and 0.6323. But if the RBNZ leaves rates unchanged, then expect the Kiwi to rise to 0.6367’s level. It is highly unlikely that the RBNZ will hike rates, as the New Zealand economy has not met any of its benchmark targets (inflation and employment). NZD/USD will also likely be affected by movements from the greenback, as more news on the US-China trade war is likely to be released before the partial deal is signed.

How will the RBNZ monetary policy decision impact NZD

Bulls and bears fight for control over the Kiwi ahead of RBNZ's monetary policy meeting (H4)

The bulls and bears are fighting for control of the Kiwi ahead of the monetary policy meeting tomorrow. If the RBNZ cuts rates, expect the bears to gain full control and put downward pressure on NZD/USD to retest the 0.6323 support level and possibly break it to range between 0.6289 and 0.6323. If the RBNZ decides to hold rates then expect the bulls to push the Kiwi towards the 0.6367 resistance level.