Article / 14 September 2016 at 0:37 GMT

Risk-off sentiment hits Kiwi and Aussie despite the data

Managing Director / Technical Research Limited
New Zealand
  • The global selloff has prompted traders to seek refuge in the safety of USD
  • This has hit AUD and NZD - despite their underlying strength
  • The Achilles' heal for NZDUSD remains the gloomy inflation outlook

By Max McKegg

Market commentators are scratching their heads trying to come up with an explanation for the selloff in financial markets over the last couple of days.

Making sense of it all is more difficult when you have stock, bond and commodity prices dropping at the same time. But traders can’t wait around for analysts to tell them why something is happening: they have to react on the spot.

And so they have over the last 24 hours, seeking refuge in the traditional safety of the USD. On the other side of the coin the biggest losers have been the high-beta currencies like the Australian and New Zealand dollars.

It would be ironic if the Aussie and Kiwi were to sell off at a time when data releases show their economies are outperforming G10 counterparts by a big margin while at the same time offering world-beating interest rates. Consider this chart of GDP growth rates:





Source: Bank of New Zealand

And this one of government bond yields:

 Source: ANZ Bank

Tomorrow we well get confirmation New Zealand’s economy is firing on all cylinders when the second quarter GDP data is released.

Economists predict growth between 1%-1.2% for the quarter, or a year-on-year increase of about 3.7%. Rising immigration will be one reason given for this impressive result but even on a per capita basis growth is running close to 1% per annum.

But the good news story is already built into the Kiwi dollar and the GDP data will probably be as good as it gets.

What happens at the Fed will be crucial for RBNZ governor Graeme Wheeler. Photo: iStock

The Achilles' heal for NZDUSD is the gloomy inflation outlook and the determination of the Reserve Bank of New Zealand to do something about it.

And so, despite the above-potential growth rate, the RBNZ is widely expected to announce a cut in the official cash rate to 1.75% in its November Monetary Policy Statement.

Indeed, money market pricing suggests a 10% chance this will be front-loaded to next Thursday’s preliminary review, a few hours after the US Federal Reserve meeting winds up.

Why would the bank be thinking of cutting rates when, if anything, they should be trying to stay ahead off the potentially inflationary effects of above trend growth?

Simply because the third quarter inflation number, due for release on October 18, now looks like being a negative number according to a number of economists, dragging the annual inflation rate back down to zero.

Yesterday’s better-than-expected food price increase suggests the RBNZ’s own forecast of a small positive CPI number for the quarter will be closer to the mark but, either way, the numbers will do nothing to lift inflation expectations among consumers, business or the financial markets.

No one is in any doubt as to why sub-par inflation is coinciding with strong economic growth: it’s the exchange rate, stupid!

That’s why the RBNZ has no choice but to cut its policy rate and hope the Kiwi dollar falls in sympathy.

No doubt they would catch traders out, and therefore get more bang for their buck, if they acted next week rather than waiting until November, but forward guidance suggests the patient approach is likely to prevail.

Of course, RBNZ governor Graeme Wheeler will have his fingers crossed that the Federal Open Market Committee will pull a rabbit out of the hat for him with a rate surprise of their own next week but that’s wishful thinking.

A better bet would be that the risk-off sentiment of the last few days takes a firm hold of financial markets and maintains downward pressure on high-beta crosses like NZDUSD.

Also on Thursday we will get some potentially market moving data out of Australia. Money markets are pricing is an 80% chance the Reserve Bank of Australia will cut its policy rate to 1.25% in the next 12 months with the state of the labour market being a key driver.

The August employment report is expected to show 15,000 new jobs created over the month, about the amount needed to keep the unemployment rate steady at 5.7%.

A number well above consensus will be required to make a dent in the unemployment rate and reduce the odds of a rate cut. Stranger things have happened: Australia’s labor force statistics can be volatile.

Meanwhile the AUDUSD remains in a medium term downtrend (see my trade view) as shown in the chart below (click to enlarge)

AUDUSD yearly chart

xxx Source: Metastock

-- Edited by Adam Courtenay

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade, then click here to follow him.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail