The kiwi posted additional long red candles during the European session after the kingmaker New Zealand First party backed the opposition party early today, forming a new coalition government. The pound fully reversed yesterday's gains in the wake of worse-than-expected retail sales.
With no single party being able to secure over half of the seats in the parliament in last month's election, the right-wing, populist NZ First party has become a kingmaker. Its leader Winston Peters has just announced that his party would form a government with the Labour Party. Kiwi's sell off after the announcement as the outcome has not been quite priced in. NZ First had cooperated with both National and Labour previously (National/ NZ First from 1996 to 1998, and Labour/ NZ First from 2005 to 2008).
The New Zealand dollar took a hit on Thursday, falling more than 1.70% against the US dollar as investors reacted to the outcome of the coalition government. The Kiwi started to tumble around mid-day local time following rumours that the Labour Party was about to form a coalition government. The official announcement came a few hours later as Winston Peter, leader of NZ First, announced his party will now back the Labour Party rather than the National Party. The Kiwi’s fall accelerated. Jacinda Ardern, leader of the Labour Party, is taking over William English’s seat as New Zealand’s Prime Minister. Winston Peters will most likely become Deputy Prime Minister.
A day after China's twice-in-a-decade Communist Party Congress commenced, statistics out of China showed that the economy continued to grow above the government's annual target, giving more confidence on President XiJinping's leadership. However, the expansion was slightly softer relative to the previous quarter, with the Australian dollar falling slightly in the wake of the data. In New Zealand, the Labour Party looks set to govern the country pushed the kiwi to a near five-month low.
Euro tumbles sharply while Yen jumps on as political risks come back to markets. Passing the deadline imposed to Catalan leader Carles Puigdemont, Spanish government said they will "continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia." That is, the Spanish Government is going to suspend autonomy of Catalonia.
A busy week for economic data will start tonight when Statistics New Zealand releases the nation’s third quarter inflation figures. The Consumer Price Index (CPI) is expected to have risen by 0.4% quarter-over-quarter. If correct, this would be an improvement from Q2 when CPI had remained flat, though it would still be a much smaller increase compared to the 1% rise in Q1. Depending on the outcome of CPI, we could see a sharp move in the New Zealand dollar. The data will obviously have to deviate from expectations by a sizeable margin if were to see that sharp movement, though even if it matches forecasts we think that the NZD would rise rather than fall. There will be additional data later on in the day on Tuesday when GDT’s closely-watched Price Index is published. This fortnightly-released index measures the weighted-average price of the 9 dairy products sold at the auction. Previously, the index had shown an unexpected 2.4% drop. Any improvement this time could support the NZD. Changes in dairy prices are very important for the New Zealand economy given that milk, meat, wool and wood products and fish are among its main exports.
The New Zealand Dollar made good ground this past week and traded above 0.7400 against the US Dollar. However, the NZD/USD pair struggled to sustain momentum and currently trading below 0.7360. Looking at the 4-hours chart of NZD/USD, it seems like the pair is forming a short-term top near 0.7433. The pair started a downtrend and moved below the 38.2% Fib retracement level of the last wave from the 0.7182 low to 0.7433 high.
Once the FOMC meeting and press conference are both out of the way, the near term direction for the dollar should become clearer. For those who prefer to focus on something else, crude oil or a non-dollar FX pair would be a good place to start.
The New Zealand dollar had surged by around 10% between May's 2017 low point and July's two-year high, making it one of the better performing currencies of the year against the US dollar. However, central bank unease about the strength of the currency, downgrades to the government's growth forecasts and an unexpectedly tight election race have derailed the rally.
The New Zealand Dollar likely formed a bottom near 0.7220 this week against the US Dollar. The NZD/USD pair is back in the bullish zone and might soon face sellers near 0.7350-0.7390. The pair recently made a nice upside move and cleared the 23.6% Fib retracement level of the last decline from the 0.7558 high to 0.7223 low. Buyers also succeeded in breaking a major bearish trend line at 0.7300 on the 4-hours chart.
The past two months have seen a substantial rally in commodity prices. Since mid-June, iron ore has risen from USD53 per tonne to USD76 currently. Also supportive has been a lift in coal prices, thermal coal increasing from USD81 per tonne to USD99, as well as a rally in crude oil, the Brent benchmark rising from a mid-June low of USD45 per barrel to around USD52 currently.
Early on Thursday, RBNZ policymakers gathered to decide on monetary policy. As it was widely expected, the RBNZ held cash rates unchanged maintaining rates at a record low of 1.75%. However, the bank’s preference over a lower exchange rate, expressed after the release of the statement, pushed the kiwi down to a four-week low, while electronic retail sales figures pressured the currency further.
The RBNZ kept its policy unchanged overnight, as was widely anticipated. The Bank acknowledged that CPI inflation softened in Q2, but noted that it still remains within the target range. Importantly, officials did not push back the timing of their first planned rate hike (Q1 2020), as may have been anticipated in the face of softer data. They did, however, express a greater discomfort about the recent strength of the Kiwi, indicating that 'a lower New Zealand dollar is needed”. In the previous statement they only noted that 'a lower New Zealand dollar would help”. Nonetheless, the language around the economic outlook as well as the currency may have been less dovish than what was expected by investors, evident by the spike higher in NZD on the decision.
As expected, the RBNZ left the OCR unchanged at 1.75%. Governor Wheeler reiterated that the monetary policy would remain accommodative for some time. The staff projection continued to forecast the first rate hike to come in 2H19. They also revised lower the short term inflation outlook and intensified the warning that a lower currency is needed for growth. NZDUSD jumped to a 3-day high of 0.7371 after the announcement, but gains were erased afterwards.
The past three months have generally seen a sharp rise for the NZD/USD currency pair, driven mostly by a heavily pressured US dollar that has fallen significantly against most of its major counterparts. Since the late-July peak above the key 0.7500 resistance level, however, NZD/USD has experienced a substantial pullback that was exacerbated last Friday when the US dollar finally found some relief on a much better-than-expected US jobs report. The latest culmination of this pullback has been a tentative breakdown on Tuesday below a key uptrend support line extending back to the early May lows.
Kiwi lovers experienced losses in their holdings for the second day after the number of people employed in New Zealand dropped suddenly in the second quarter, disappointing expectations. Statistics New Zealand released early on Wednesday employment data for the June 2017 quarter. After six quarters of employment growing positively, the number of employees dropped by 0.2% (4,000 people quarter-on-quarter), surprising analysts who anticipated instead for growth to slow down to 0.7% from 1.2% in the previous quarter. In addition, the participation rate went down to 66.7% compared to 67.1% in the March quarter. A reason for this downfall was mainly a rise in working-age population which expanded by 20,000 people (0.5%) in the June quarter and fell below the employment growth for the first time since September 2015.
The New Zealand Dollar after an impressive ride towards 0.7550-60 against the US Dollar found offers. The NZD/USD pair started a correction and now approaching a major support near 0.7400 The pair traded below the 23.6% Fib retracement level of the last wave from the 0.7201 low to 0.7558 high recently. It has opened the doors for further losses towards 0.7420-00.
The Kiwi dollar came under selling pressure overnight, following the release of New Zealand's employment data for Q2. Even though the unemployment rate ticked down as expected, the labor force participation rate dropped significantly, missing its forecast for an uptick. This implies that the number of unemployed people may have fallen, but that was probably owed to a decline in the total number of people looking for work. As such, these are likely downbeat news for RBNZ officials, who meet next week to decide on policy. Coming on top of the decline in the CPI rate for Q2, which now lies notably below the RBNZ's own forecasts, we believe that these soft data are enough to keep the Bank from turning hawkish anytime soon.
Employment data helped to extend losses for the Kiwi from recent highs and we ponder if it, along with other commodity currencies, could be the canary in the coal mine for a rebound in the USD. Dairy prices contracted by -1.6% overnight, their fastest rate of contraction since March and the first data set over the next 23 hrs which were to weigh on the flying Kiwi. The employment report was received with a glum tone, despite not being that bad overall, although it could also be argued the NZ Dollar was due for a correction of some sort anyway.
New Zealand's employment figures for the second quarter will be released tonight at 23:45 BST (Wednesday morning NZ time). Employment is expected to have risen 0.7% in Q2 following an increase of 1.2% in Q1. The rate of unemployment is seen falling to 4.8% from 4.9 per cent previously. The numbers may have to beat expectations if the kiwi is going to sustain its recent rally, for earlier the fortnightly Global Dairy Trade (GDT) auction saw prices fall 1.6% following a 0.2% increase at the previous sale.
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