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- NZD lags all other than CAD in global riposte against the USD.
- Business NZ survey sees industrial sector in decline this quarter.
- PMI fall below 50.0 sustained in August, after RBNZ spooks in July.
- NZD must hold 0.6365 to keep upward correction alive says UOB.
The New Zealand Dollar lagged behind most of its major rivals in a global riposte against the U.S. greenback Friday after an influential business survey suggested output from the Kiwi manufacturing sector may have contracted in the third quarter, heaping more pressure on the Reserve Bank of New Zealand (RBNZ) to aid the economy.
New Zealand's Dollar was lower against all of its major rivals other than the Canadian Loonie Friday while Pound Sterling, which rose against all of its counterparts, scored its best gains over the ailing Kiwi currency. Losses came after a Business NZ survey suggested Kiwi manufacturing output contracted for a second consecutive month in August, a month that coincided with a significant escalation of the U.S.-China trade war.
The Business NZ manufacturing PMI rose from 48.1 to 48.4 in August but remained below the crucial 50.0 no-change level after having fallen sharply back in July when the RBNZ was said to have spooked businesses and households by cutting its interest rate 50 basis points that month. The lobby group says new orders fell further last month, taking them to their lowest level in a decade, and that production output actually fell too after having been positive in July.
"A reading below 50 implies a contraction in manufacturing output. The components of the manufacturing PMI survey also paint a fairly concerning picture about the state of New Zealand’s manufacturing sector," syas Elias Haddad, a strategist at Commonwealth Bank of Australia.
Above: NZD/USD rate shown at hourly intervals.
PMI surveys measure changes in industry activity by asking respondents to rate conditions for new orders, production, hiring intentions, prices and inventories. A number above 50.0 indicates industry expansion while a number below 50 is suggestive of contraction. The survey results often correlate with official measures of output, although they can often be wide of the mark too.
Friday's survey results came at a time when global growth is weakening and analysts are watching most markets closely for signs of further weakness up ahead, although some are paying particularly close attention to New Zealand because the RBNZ has proven itself to be the most proactive of major central banks. GDP growth fell from 4% to 3.2% in the 12 months to the end of March and is projected by the RBNZ to be just 2.6% in the year to March 2020.
The RBNZ has cut its interest rate three times in 2019, by a total of 75 basis points and to a new record low of 1%, in the hope of lifting inflation by stimulating the economy with lower borrowing costs. Kiwi inflation was already stuck below the target even before the U.S.-China trade war began hurting the global economy. But trade-related slowdown in the economies of various trade partners has necessitated action.
"While NZD finally touched the 0.6450 level that was first indicated on Monday (09 Sep, spot at 0.6425) yesterday, it retreated quickly and ended the day just above the low. Upward momentum has waned considerably and the odds for further NZD strength above 0.6450 have diminished. However, only a break of 0.6365 (no change in strong support level) would indicate that the recovery that started last week has run its course," says Quek Ser Leang, a strategist at United Overseas Bank (UOB).
The Dollar has benefitted from uncertainty and economic fears thrown up by the tariff fight between the world's two largest economies while most others have suffered from it, including the New Zealand Dollar.
Above: NZD/USD rate shown at daily intervals.
"USD is getting clobbered as we approach the end of the London morning, and there is a rising chance that the currency will end Q3 on a rather neutral footing (at least on a YD basis, which currently has the BBDXY up by 0.70% since the start of 2019)," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "We feel vindicated having warned our readers all week long that adding to USD long positions or positioning EURUSD aggressively from the short side this week were bad ideas."
Friday's performance from the New Zealand Dollar is all the more notable because it comes in the middle of a session where so-called 'risk assets' received a widespread bid from the market, and as the U.S. Dollar declined broadly, in response to positive developments in the trade war. President Donald Trump dismissed Thursday, a Bloomberg News report claiming the U.S. is eyeing a deal to temporarily end the trade war with China, but said that he might be open to such a thing in the future.
Trump told reporters after the 22:00 New York close Thursday that he would prefer to strike a lasting deal that resolves all issues but did not rule out an interim agreement that prevents fresh tariffs going into effect in October and December while potentially rolling back new levies already imposed this month. An end to the 18-month long tariff fight would be positive for the global economy and non-Dollar currencies, which have been the real losers from the conflict with the exception of the Yen and Swiss Franc.
Xinhua, China's state-run news agency, reported later on Friday that U.S pork and soybeans will be removed from a list of products that are being targeted with retaliatory trade tariffs that were imposed in July and September. Friday's announcement followed another decision to exempt other U.S. goods from tariffs, a move that was itself reciprocated by the U.S. on Wednesday this week.
Any further suggestions that progress is being made in ending the trade spat would help the New Zealand Dollar in its fight to hold above the 0.6365 level and keep its upward correction against the greenback alive.
Above: GBP/NZD rate shown at daily intervals.
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