New Zealand Dollar: NZD/USD (NZD=X) will follow the CNY down against the USD to fresh lows
On Friday 2 August, just before dawn NZ time, President Trump tweeted that he would place 10% tariffs on the remaining $300b of Chinese imports not already facing punitive tariffs as of 1st September. This followed a restart of face-to-face talks between senior officials, where no progress on any trade deal was made. Trump was irked that China didn’t ramp up purchases of US agricultural goods as he believed was agreed and he claimed President Xi had not stopped the sale of Fentanyl to the US.
This escalation of the US-China trade war was a shock, considering that a truce had been agreed by Trump and Xi at the end of June at the G20 summit.
In terms of our currency forecasts the fateful tweet was a game-changer.
In our weekly FX commentary on 5 August we noted that “the escalation of the trade war is an alarming development – moving further away from our working assumption that some sort of agreement might have been in play late this year or early next year” and flagged downside risk to our NZD forecasts.
Trump’s escalation of the trade war has already reverberated through markets. Of particular note, spot USD/CNY moved above the symbolic 7 mark, hitherto seen to be a key level of resistance in the eyes of the PBoC and the market. Furthermore, the RBNZ delivered a shock 50bps cut to the OCR this week, taking NZ interest rates significantly down across the curve to record low levels.
The weaker yuan is not just of academic interest. As we have noted on plenty of occasions, the NZD and CNY have been closely linked since the trade war began in earnest early last year.
As downward pressure is applied to the yuan in the face of further downside risk to the Chinese economy, this week the PBoC has been actively trying to contain the market-led depreciation. China was officially labelled a currency manipulator, a political gesture by the US that won’t have any material ramifications but ironically, over recent years, the PBoC has been concerned about the risk of capital outflows and its modus operandi has been to encourage a stronger-than-otherwise currency.
With the escalation of the trade war and no resolution in sight, market forces for the yuan will remain to the downside. The risk of capital outflows and capital flight means that the PBoC will allow gradual and orderly CNY depreciation – via use of its counter-cyclical factor in daily CNY fixings – but speculative short selling will not be tolerated. Now that the 7-figure is no longer an obstacle, USD/CNY is likely to continue to head higher, even if well managed by the PBoC. This is a fresh downward risk factor for the NZD in the period ahead.
The RBNZ factored in the risks about the global economic outlook for its rates decision this week and opted for a larger than expected 50bps rate cut. While the NZD fell significantly after the announcement, much of this reflected the market being wrong-footed. At this juncture, the low in the OCR projected by the OIS curve is around 63bps, just over 20bps lower than a week ago. Over the same time the projected US Fed Funds rate is about 17bps lower over the week. NZ-US rate differentials haven’t actually changed that much and so the RBNZ’s actions are only of a secondary consideration for informing our NZD outlook. The reality is that the RBNZ is caught in the global web of central bank easing in a “race to the bottom” for interest rates, reducing the ability to use the exchange rate channel effectively from a monetary policy perspective. Our NZD revisions largely reflect the increased risks around the global outlook and bearish view on CNY, than monetary policy considerations.
Our prior NZD projections were predicated on two key assumptions. One, that the USD was close to a turning point, with the weaker US economic outlook (become more in synch with the rest of the world) and the Fed’s remarkable shift in view earlier this year, from one of projecting rate hikes to delivering rate cuts. The second assumption was that US-China trade tensions would ease, seen culminating in some form of trade deal either late this year or early next year, with no further ramp-up in tariffs in the meantime.
These assumptions led us to believe that the worst was over for the NZD and our projections built in a mild recovery through the rest of the year (targeting 0.67-0.68) and into 2020 (reaching and nudging just above 0.70). That is clearly too optimistic now in the face of the trade war escalation.
Overall, the bias in prices is: Downwards.
The projected upper bound is: 0.66.
The projected lower bound is: 0.64.
The projected closing price is: 0.65.
A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 4 white candles and 6 black candles for a net of 2 black candles. During the past 50 bars, there have been 27 white candles and 22 black candles for a net of 5 white candles.
A spinning top occurred (a spinning top is a candle with a small real body). Spinning tops identify a session in which there is little price action (as defined by the difference between the open and the close). During a rally or near new highs, a spinning top can be a sign that prices are losing momentum and the bulls may be in trouble.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 44.8166. This is not an overbought or oversold reading. The last signal was a buy 5 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 31.33. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 2 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -94. This is not a topping or bottoming area. The last signal was a buy 1 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 12 period(s) ago.
Rex Takasugi – TD Profile
FOREX NZD= closed up 0.000 at 0.647. Volume was 99% below average (consolidating) and Bollinger Bands were 98% wider than normal.
Open High Low Close Volume___
0.646 0.647 0.646 0.647 223
Short Term: Neutral
Intermediate Term: Bearish
Long Term: Bearish
Moving Averages: 10-period 50-period 200-period
Close: 0.65 0.66 0.67
Volatility: 9 9 10
Volume: 35,959 36,037 42,020
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
FOREX NZD= is currently 3.8% below its 200-period moving average and is in an downward trend. Volatility is relatively normal as compared to the average volatility over the last 10 periods. Our volume indicators reflect volume flowing into and out of NZD= at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bearish on NZD= and have had this outlook for the last 9 periods.