NZDUSD flatlines as investors tread carefully

August 26, 2015

It has been a very interesting session in Asia, dominated by uncertainty. Equity markets are unsure of which direction to head in Asia, with many of the main exchanges spending most of the session bouncing between gains and losses. After falling around 22% in the past four days, the Shanghai Composite Index jumped between red and black during its morning session, despite the PBoC’s decision to loosen monetary policy after the market closed yesterday.

It was a very quiet data day in Asia, and the little bit of data that was released largely took a backseat to overall investor sentiment. In NZ, trade figures showed a larger than expected deficit in July at 649m (exp. 600m), with both exports and imports beating expectations. Exports jumped 4.2bn and imports increased 4.85bn, beating expected figures of 3.83bn and 4.4bn respectively. The strong performance of the overall export market was somewhat tainted by flat dairy exports, NZ’s largest export; the increase was underpinned by a 24% gain in foreign meat sales and a 51% jump in fruit exports, thus it’s not exciting the market.

The kiwi didn’t react heavily to the data, largely because the market is focused on investor sentiment and events in China, but also because the figures are fairly neutral overall and shouldn’t materially impact NZ monetary policy. Investors are still concerned about the effect that tumbling dairy prices are having on the NZ economy, despite an increase in GDT’s last auction prices. Prior to the last auction, which showed a 14.8% increase in prices, the GDT Price Index had fallen at the previous 10 auctions, which is bad news for an economy that relies heavily on dairy exports.

It seems the only hope for the kiwi at the moment is if dairy prices rise consistently over an extended period of time, which could ease some pressure on the RBNZ to lower the official cash rate further, but China’s gloomy economic outlook and generally soft levels of global demand are hampering commodity prices across the board. Hence, kiwi traders are focused on overall investor sentiment, which is being moved at the moment by the situation in China, and the impact this is having on commodity prices.


While the market keeps one eye on China and global sentiment, it will also be watching some important US economic data. The turbulence in the market has pushed out expectations for policy tightening by the Fed, but this is being outdone by safe haven flows into US treasuries. However, if the monetary policy outlook in the US deteriorates any further, the market may begin to sell US dollars, pushing NZDUSD higher. A stronger exchange in NZ, especially as commodity prices fall, may increase the RBNZ’s motivation to cut interest rates, which is generally a kiwi weakness but it could take a backseat the aforementioned potential USD strength.

US economic data:

Thursday 1230GMT

• US Secondary GDP (Q2): The first reading of US GDP showed an encouraging 2.3% q/q annualised growth rate and the pace of growth in the first quarter was revised higher to 0.6%. The second release is expected to show that the economy expanded at an annualised q/q pace of 3.2%, with personal consumption increasing 3.1%.

• Due out at the same time as US GDP figures is the latest set of initial jobless claim numbers. US initial jobless claims have steadily been trending lower since the beginning of 2009 and are now hovering below pre-crisis levels and the market won’t want to see a reversal of this trend.

Friday 1230GMT

• Consumer spending in the US accounts for around two-thirds of all economic activity, thus it’s a very important gauge of the overall health of the economy. In July, the market is expecting personal income to have increased 0.4% and retail spending to also jump 0.4%, after rising 0.4% and 0.2% in June.

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