After the equivalent of three interest rate cuts in a little over half a year, you generally expect the change in monetary policy to have had some effect on the economy. That is why analysts are going to be interested in the data the be released later tonight! The upcoming data will give us an understanding of where the trends are going.
The NZDUSD has been sliding down at an almost constant pace since the last meeting of the RBNZ. In part, we can attribute that to the expectation of further easing, which Governor Orr has done his best to transmit to the market.
The question now is where to expect a floor, and what kind of fundamentals would we expect to see before the pair turns around.
What We Are Looking For
We expect business confidence in New Zealand to decline further to -51.1 compared to -44.3 in last month’s survey. This would put it basically on par with August of last year, and continue the worsening trend seen since summer.
Some seasonal fluctuation isn’t exactly extraordinary. Outlook tends to diminish during the winter. However, several economists have been expressing concern over the business outlook, and the lack of drive to improve the economy over the next year.
The headline number is the one likely to move the markets. However, traders might also want to look at the components to get some insight into future trends. Particularly relevant to the currency is the pricing component, which last month showed that the leading businesses kept the same expectations as prior. This means that they did not expect inflation to increase much, despite the RBNZ’s actions.
Another factor is employment intentions. These turned negative last month, showing businesses intend to not only hire fewer people but potentially cut employment over the next year.
Investment intentions actually turned negative for the first time this year. This shows that businesses are planning less capital expenditure this year, another factor that will put pressure on the currency.
The Broader Situation
Many traders are looking at the virtually straight line in the NZD graph and speculating about a “return to the 90s.” The 90s is when there was relatively little volatility in the kiwi. One of the factors that economists point to is that the entire market is being depressed by a single major event that is impervious to domestic action: the US-China trade war.
This doesn’t exactly coincide with the reversal in business sentiment, however, which turned negative in late 2017 and hasn’t recovered since. It’s a lot closer to matching the fallout from the last general election.
Several leading economists in New Zealand tried to explain this situation in a symposium on Monday. They came to the conclusion that domestic action would have little effect on both the economic outlook and the currency.
New Zealand’s Unique Position
While global economic concerns keep investors inclined towards safe havens, commodity currencies such as the NZD are likely to remain under pressure. But, the Kiwis are in a somewhat unique position in that their exports to China are primarily consumer goods for the domestic market. Chief among them is dairy – and China’s domestic market remains vibrant despite the trade war.
If this economic analysis is correct, we could see a continuation of the data trends. And this would frustrate the RBNZ. The question is whether they acknowledge they can’t influence the situation, or they double down on more easing. And a lot of analysts are betting on the latter!