Tuesday, September 24, 2019

All eyes on the Supreme Court’s ruling in the UK today; will the Royal Bank of New Zealand cut rates on Thursday?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Sterling falls as Brexit optimism fades, safe haven assets continue to rise

The UK Supreme Court will rule today at 1.30pm (GMT +4) on whether Prime Minister Boris Johnson acted unlawfully when he recently suspended parliament. The ruling is a crucial and historic one, and could affect his plans for the UK to exit European Union by October 31st. With hope of a Brexit deal fading, sterling fell during the night, breaking 1.245’s level and falling as low as 1.241.

There was little change when the US markets closed yesterday, as disappointing economic data outweighed optimism regarding the ongoing US China trade war. Markit preliminary PMI data released on Monday revealed that Germany’s manufacturing sector is slowing faster than expected, while its services PMI disappointed as well. The US preliminary manufacturing PMI report also showed a possible slowdown in the employment sector. The DJIA inched higher by 0.06%, while the S&P 500 remained flat, losing 0.01%. The Nasdaq fell 0.06%.

Safe haven assets continued to gain amid rising concerns over global growth. Gold soared as high as 1,525 and the Japanese yen gained against the dollar, with USD/JPY falling to as low as 107.36’s level. The Dollar Index rose roughly 0.1% on the day.

US Treasuries yields had another mixed session, with two-year yields ending lower, while 10-year yields closed with little change. However, 30-year yields inched higher to 2.17%.

Today’s Analysis: RBNZ to adopt a ‘wait and see’ approach after unexpected 50bps in August?

The Royal Bank of New Zealand (RBNZ) will announce its monetary policy decision on Wednesday, September 25th at 6am (GMT +4). The central bank cut its Official Cash Rate (OCR) in its last meeting by 50bps, which surprised analysts and saw the Kiwi fall 1.21% against the dollar. The last cut of this magnitude was in 2011 after the Christchurch earthquake. RBNZ officials justified their decision by highlighting a slowing of domestic GDP growth over the past year, alongside the ongoing global economic slowdown. The central bank’s desired inflation rate is between 1% and 3% on average in the medium term, with a long-term average inflation target of 2%. New Zealand’s economy is reliant on exports, which account for roughly a third of its real expenditure GDP. China is New Zealand’s biggest trade partner, accounting for 21% of total exports, followed by Australia at 17% and finally the US, which made up 10% of its total exports in 2018. Its largest export products can be found in the agricultural industry, specifically dairy (26%), meat (13%) and forestry (9.1%).

As China, the US and Australia are all major contributors to New Zealand’s economy, the US China trade war and the slowdown in China’s economy have had a negative impact on the country.

NZD/USD since the start of US-China Trade War

Economic data, though, has been mixed. Consumer confidence has fallen to 103.1, while its trade balance fell into deficit in July. The country’s inflation rate fell year-on-year in the first two quarters of 2019, although it was well within its target range – it was at 1.5% in Q1 and 1.7% in Q2. The labour market strengthened as the unemployment rate fell to 3.9% in Q2 (from 4.2% in Q1), its lowest rate in 11 years. The housing index rose to 0.3% in June, up from 0.2% in May. The GDP annualised growth rate fell to 2.1%, amid a slowdown in both the services and manufacturing industries.

GDP Annualized Growth Rate (YoY)

Domestically, inflation is in line with the RBNZ’s target and the labour market remains strong. Internationally, trade tensions have eased over the past month and oil prices are expected to rise in the short term. We therefore can expect RBNZ to hold its OCR at its current low level of 1%. As the RBNZ is slated to meet this month and in November, it will likely use its upcoming meeting to keep rates unchanged. You can expect it to continue monitoring both its domestic and the global economic outlook before considering a rate cut.

Therefore, we expect investors to look for signs that the RBNZ will suggest a further rate cut, which may cause the Kiwi to drop slightly to 0.625’s level but not more than 0.620’s level (as the market prices in the chance of a rate cut). The currency may rise to 0.6330’s level or higher should the RBNZ not signal a rate cut for the next meeting in November.