New Zealand Dollar Tipped for Return to 2019 Low as Incoming Data Weighs 

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- NZD seen by CBA returning toward 2019 low this week.

- Says lower milk prices and weak retail sales will weigh.

- UOB says NZD momentum to downside in month ahead.

- J.P. Morgan reiterates forecast for post-crisis low in 2020.

The New Zealand Dollar was treading water on Monday after lagging behind G10 rivals at the opening of the new week, and multiple analysts are saying the Kiwi currency is likely to extend its months-long downtrend in the days ahead as domestic data lays bare the challenges faced by the economy. 

New Zealand's Dollar softened Monday even in spite of a 'risk-on' mood among investors that helped almost all so-called risk assets higher at the beginning of the new week, with speculation about possible increases in U.S. and German government spending driving the upturn. 

President Donald Trump's top economic adviser Larry Kudlow told Fox News on Sunday "there's no recession in sight" and that the White House is examining what room there might be for another round of tax cuts to help sustain the economic expansion, little more than a year after the first round proved so succesful in lifting U.S. growth.

Those comments came in the wake of a string of media reports published over the course of last week that suggested the German government is contemplating abandoning the balanced budget policy that's underwritten its appetite for austerity in recent years. Any shift away from the 'fiscal tightening' stance would be a boon for the struggling German economy, which some say risks a recession this year, and the Euro as well because Germany accounts for a significant portion of Eurozone output.

"We’ve seen a couple of recent stories with credible, but unknown sources citing Germany’s intent to expand its fiscal policy in the event of a recession, but now it’s getting a bit more official as German finance minister Scholz specifically indicated the potential to expand spending €50 billion, or about 1.5% of GDP  - fairly modest stuff, but a signal nonetheless. Still, German 10-year bunds are yielding below -65 basis points this morning," explains John Hardy, chief FX strategist at Saxo Bank.

Above: NZD/USD at hourly intervals, with oil (green), gold price (orange) and VIX 'fear index' (purple).

Central bankers the world over have been calling for governments to break with the post-crisis penchant for austerity by using fiscal policy in order to get their economies going, given many of them have pushed their interest rates to levels that are so low, further rate cuts are now seen as being only of limited use. The most notable example is the European Central Bank (ECB) although the Reserve Bank of Australia (RBA) has also been increasingly vocal this year. 

The prospect of concurrent tax cuts in the U.S. and spending increases in Germany could be seen by the markets as a gamechanger for the global economy, which has been wounded severely in the last 18 months by President Donald Trump's trade war with China. New Zealand's large agricultural commodity trade, particularly with China, means the Kiwi is sensitive to developments in China as well as those around the broader global economy. 

"NZD/USD will remain heavy this week. Subdued New Zealand economic data could see NZD/USD depreciate toward its 7 August low of 0.6378. Global Dairy Prices are expected to fall around 1% this week, while ASB expects Q2 retail sales to lift just 0.2%/qtr (Thursday)," says Richard Grace, head of FX strategy at Commonwealth Bank of Australia (CBA). "AUD/NZD will likely find near‑term support around the 200‑day moving average of 1.0514."

Above: Pound-to-Kiwi rate and AUD/NZD (green line, left axis), alongside VIX 'fear index' (purple).

Tuesday's GlobalDairyTrade auction is expected to see milk powder prices fall by 1%, which could weigh on the Kiwi because dairy powder is New Zealand's largest export. It is effectively a large part of what underwrites the Kiwi Dollar. Grace says sales numbers for the recent quarter won't provide comfort to the Reserve Bank of New Zealand (RBNZ), which has been cutting its interest rate in the hope of stimulating the economy and lifting inflation up ahead.

Consensus is looking for retail sales to have risen 0.1% in the second quarter, down from 0.7% during the early months of the year. Grace says the current low levels of consumer and business confidence, which are among the lowest seen since the financial crisis, will continue to hold back sentiment and overall economic activity up ahead.

Kiwi business confidence has been at decade lows ever since talks in the wake of the 2017 election resulted in the installation of a Labour-led coalition government, which has since legislated to radically increase the minimum wage and to cancel tax cuts that were announced by the previous government. 

"The lackluster price action in NZD over the last few days has resulted in a loss in momentum. That said, we continue to see chance for NZD to weaken further to the Jan 2016 low of 0.6348. However, in view of the waning momentum, the next support at 0.6235 is likely out of reach this time round. On the upside, only a move above 0.6500 would indicate that the current downward pressure has eased," says Quek Ser Leang, a strategist at United Overseas Bank  (UOB). 

Above: Pound-to-New-Zealand Dollar rate at monthly intervals, and NZD/USD (green line, left axis).

This week's dairy auction results and retail sales numbers will be viewed by the market through an RNBZ shaped lense, with investors most interested in what they might mean for the central bank's interest rate policy. Financial markets are already pricing-in one more rate cut from the RBNZ for this year, with the November 13 cash rate implied by pricing in the overnight-index-swap market on Monday sitting at just 0.78%. 

The RBNZ cut its cash rate by 50 basis points to 1% this month, taking the market by surprise, in an effort to support the economy amid the ongoing U.S.-China trade war and its uphill battle to get Kiwi inflation back above the long-elusive midpoint of the 1%-to-3% target. If the bank cuts again this year it will almost certainly have been the most proactive central bank in the G10 universe, leaving Kiwi borrowing costs at record lows and levels comparable with European economies like the UK. 

"We continue to think the RBNZ will be sensitive to global developments, and wary of any tightening of financial conditions that may come from failure to maintain negative rate differentials. With the central bank actively policing short-term rate spreads, we remain comfortable with a slightly negative bias on NZD," says Sally Auld, chief economist for Australia and New Zealand at J.P. Morgan. "We remain bearish on NZD/USD, forecasting 0.62 at Jun-20." 

Further cuts from the RBNZ would be bad for the Kiwi because New Zealand's Dollar has traditionally offered investors who own it a higher yield than many other developed world currencies, due largely to the fact that Antipodean interest rates have typically been much higher than those in other parts of the developed world. However, and now, the RBNZ rate of 1% is radically below the Federal Reserve rate of 2.25% and only 25 basis points higher than the 0.75% level of the Bank of England. 

Changes in rates are normally only made in response to movements in inflation, which is sensitive to GDP growth, but impact currencies because capital flows tend to move in the direction of the most advantageous or improving returns. Those flows tend to move in the direction of the most advantageous or improving returns, with a threat of lower rates normally seeing investors driven out of and deterred away from a currency.  


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