Fundamental Analysis: More Losses for NZD on Trade and Rates

Fundamental Analysis: More Losses for NZD on Trade and Rates

The New Zealand dollar has continued its downward movement overall today against most major currencies. Trade wars and ongoing fallout from the cut to the cash rate have affected NZD. Conversely, shares have provided some support.

NZDUSD at about 65.5 US cents remains near six-month lows. The euro’s gains against the Kiwi dollar were smaller, though, with the common currency struggling to move much above $1.707 today. NZDJPY meanwhile reached fresh 2019 lows below ¥72 in the early afternoon GMT.

Rate cut catalyzes losses

Despite the fact that the Reserve Bank of New Zealand (RBNZ)’s decision to cut rates last week was widely expected, this is a strong negative for NZD. Before the cut, 1.75% was one of the higher rates among major currencies, spurring demand for the Kiwi dollar as part of the carry trade.

However, the cut to 1.5% puts NZD below CAD and on par with its neighbor across the ditch. The Kiwi dollar has been moving down on the whole since the news from the RBNZ last Wednesday.

More tariffs and weaker Chinese data

Higher tension over trade between the USA and China has also added some fuel to NZD’s losses. The main issue is higher tariffs and their impact on prospects for growth and sentiment. In environments of weaker risk appetite, the New Zealand dollar usually does poorly.

To some extent, slowdowns or threats of the same in China also affect the Kiwi dollar because of New Zealand’s close trade relationship with China. Weaker growth in annual industrial production in China at 5.4% this morning had a negative effect on NZD.

Shares and dairy could prop up NZD

Although currencies react badly to rate cuts, shares are usually the opposite. Lower rates in New Zealand have spurred the S&P/NZX 50 up recently. The index made an all-time high of 10,169 in today’s session. Lower rates usually drive shares up because dividends’ relative returns become higher and companies listed can access cheaper loans. The NZX in turn supports the Kiwi dollar because higher shares mean more demand for Kiwi dollars to buy them.

Dairy products - a critical sector of New Zealand’s exports - have also supported NZD recently. Shares in New Zealand’s biggest listed company, A2 Milk, gained 2.6% today. Global Dairy Trade’s price index also continued its upward trend last week at 1,086. This is the highest figure for the index since June 2017.

Data and shares in view this week

Thursday is the most important day this week in terms of Kiwi data. Business PMI is due out at 22.30 GMT that night. Quarterly changes in producers’ prices (inputs and outputs) come 15 minutes later. The consensus indicates an increase except for input PPI.

Australian figures tomorrow morning could also affect NZD because of New Zealand’s close trade relationship with Australia. Employment change and other figures from the other side of the ditch are expected to cause volatility, especially for AUDNZD.

Beyond data, shares in New Zealand are likely to be in focus for traders in the rest of the week. More gains by the NZX 50 could give a boost to the Kiwi dollar.

More losses possible for the Kiwi dollar

Fundamentals for the New Zealand dollar are generally somewhat negative, making an ongoing downward movement the most favorable scenario.

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