nzdusd have bears had their fill 2250942015

The diverging monetary policy objectives of New Zealand and the US have made NZDUSD an easy target recently, with the pair hovering around its lowest level in over six years. The kiwi’s once strong fundamental supports have almost completely eroded alongside NZ’s monetary policy outlook and rising fears about the health of the global economy. At the same time, the US dollar has benefited from the prospect of monetary policy tightening from the Fed and increased safe haven flows amidst a risk-off tone in the market.

Why do bears love the kiwi? 

Deteriorating domestic economic conditions, falling commodity prices and increased concern about the health of China’s all-important economy swamped the NZ dollar in late 2014 and for most of this year. Dairy prices were falling at auction consistently and domestic economic data took a turn for the worst, leading the RBNZ to aggressively ease monetary policy, cutting the OCR at three consecutive meetings by a total of 75bps.

The RBNZ is also widely expected to lob another 25bps off the OCR at its next meeting in October due to softer than expected Q2 growth figures and a still weak inflation outlook, but we aren’t expecting further easing beyond this. Dairy prices are rebounding and the domestic economy is showing signs of life, with manufacturing sentiment picking up in August alongside a still strong housing market. This may be enough to push the RBNZ into neutral later this year, assuming domestic economic data plays along until then.

NZDUSD rebound?

Meanwhile, expectations for tighter monetary policy in the US are being delayed due to turbulent financial markets and a soft outlook for US inflation. This could be enough to encourage a short-term rally in NZDUSD, although it’s still very early days. There are still a lot of fundamental headwinds for NZDUSD which are weighing heavily on the pair’s long-term outlook, but investors should be on the lookout for short-term opportunities.

Data watch this week:

Wednesday 0145GMT – Caixin China Flash Manufacturing PMI (September)

·         Concerns about the health of China’s massive economy are a major contributor to the recent turmoil in global financial markets; concerns which were sparked by abysmal manufacturing data. In August, we’re expecting a slight improvement in China’s private sector manufacturing index to 47.5 from 47.3, which is still well below the 50-level which separates optimists from pessimists.

Wednesday 2245GMT – NZ trade balance (August)

·         The heavily export based economy is expected to see exports slip in August to 3.58bn, from 4.2bn in the prior month. The overall trade deficit is expected to widen to 850m from 649m.

Thursday 1230GMT – US durable goods orders (August) and unemployment claims

·         While no one is really questioning the health of the US labour market at the moment, it’s worth keeping one eye on the data in case it misses expectations which could lead to significant US dollar volatility. Meanwhile, durable goods orders are a good indication of economic activity in key US sectors, with the market expecting a 2.2% drop in August.

Friday 1230GMT – US Final GDP (Q2)

·         We are expecting the figures to confirm what the market already knows, that the US economy grew at an annualised pace pf 3.7% last quarter. Personal consumption and the GDP Price Index are expected to rise 3.1% and 2.1% respectively, matching the last set of numbers.