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RBNZ in Focus

Worldwide coronavirus cases surpass 31.2 million with over 964,000 official deaths.

Currency markets have been in a holding pattern after a week of consolidations. Equity markets are trading around where they were a week ago while currencies have been confined to recent ranges after a flood of central bank meetings including the Federal Reserve decision. Risk markets were up and down with mixed economic date announcements out of Australia. Some crosses look to be trading the opposite to expected directions- the AUD one of them. The Japanese Yen also which is seen as a “safe Haven” currency to park money when things aren’t so rosy ended up the strongest currency even though markets generally traded through pockets of positivity. Sentiment turned negative just ahead of the weekend sparked by a number of scenarios led by news of a small chance the US Government will execute a new stimulus package.

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FX Update

Worldwide coronavirus cases surpass 30.3 million with over 950,000 official deaths.

New Zealand second quarter GDP turned out to be a big “wet fish”, coming in at -12.2% based on rough estimates of -12.0% predicted. The announcement had very little effect on the NZD broadly with most crosses fairly unchanged post announcement. The data however marks the biggest quarterly fall in New Zealand history with the deepest contraction on record. It puts the country formerly in a recession after first quarter GDP released down 1.6% earlier in the year. Most other economies have already announced their second quarter numbers with France almost -14%, UK posting a y/y drop of 21.7% and the US at -9.5% and Australia at -7.0%. The difference of rebounds in third quarter growth results should be dictated by coronavirus lockdowns and how governments have responded. In theory the NZ economy should bounce back hard towards year end and early 2021 as second wave lockdowns have not been as extreme as Australia for example.

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Central Bank Excitement Looms

Worldwide coronavirus cases surpass 29.4 million with over 932,000 official deaths.

Wholesale swap rates -particularly the 2 and 3 year yield dropped below zero last week along with the 2023 NZ Government Bond rate which went to -0.025%. Since then these rates have traded back into positive territory but this if anything marks a moment in time of things to come. The NZ cash rate has been forecast to go below 0 for a while with analysis predicting the rate could be at -0.5% come April 2021 monetary policy release. Recent words from Adrian Orr confirming a combination of negative rates and fixed term lending will likely be started if/when further stimulus is required.     

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FX Update

Worldwide coronavirus cases surpass 28.3 million with over 913,000 official deaths.

The Japanese economy weakened by 7.9% in the second quarter of 2020 after a 8.1% expected drop. This comes after a 0.6% drop in the first quarter and a 1.8% fall in the fourth quarter of 2019. The terrible decline in the second quarter was the largest quarterly fall in Japanese history as coronavirus deepens the economy. Also out this week was second quarter Eurozone GDP with the Euro area shrinking 11.8% in the 3 months to the end of June. This was slightly lower than initial predictions of 12.1% falls but is the largest growth evaporation on record sending the economy formally into recession after a first quarter decline of 3.6%.      

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FX Update

Worldwide coronavirus cases surpass 26.4 million with over 872,000 official deaths.

Any hint of Adrian Orr suggesting the New Zealand Dollar was overvalued yesterday was put to bed as he shrugged off speculation he was going to talk down the kiwi. He said he was not concerned over New Zealand Dollar current exchange rates with relatively resilient exports providing the New Zealand economy with a buffer. His comments also highlighted his challenges facing the central bank as they try to stimulate growth without making the current financial and social situation worse. There is a perception that actions by central banks are only benefiting those holding assets but the biggest contribution it is making is in economic well-being by boosting employment through sustained lower rates. The NZD went on to post fresh highs post Orr’s release in the NZDUSD cross, clearly having an opposite effect on price to what markets were expecting. The RBNZ lowered its cash rate to 0.25% in March this year and could cut it further into negative territory towards the end of the year, in efforts to keep downward pressure on retail interest rates.

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FX Update

Worldwide coronavirus cases surpass 25.6 million with over 854,000 official deaths.

Auckland shifted to level 2 Monday morning – actually level 2.5 as our restrictions are slightly different to the rest of the country’s level 2 old school level. Gatherings are limited to 10 people and 50 in cases of Tangi’s or funerals. The wearing of masks is now compulsory on all public transport and encouraged while in public spaces. Globally the virus has surpassed 25.3 million total cases as the USA then Brazil and India clock up the most cases. It won’t be long before India given the sheer number of people could bypass the USA’s 6.2million. It is said that for each week NZ is at a level 3 lockdown with the rest of NZ at level 2 this costs the NZ Govt around 300M per week economically which is approx 0.5% of GDP.

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FX Update

Worldwide coronavirus cases surpass 24.6 million with over 835,000 official deaths.

Auckland coronavirus lockdown (level 3) has been extended to August 30th 

I’m wondering about the discrepancies between “real data” and what’s actually happening in the US at the moment. It seems headlines and economic data announcements are highlighting major disparities. Hopes of vaccines, progress in the US/China trade negotiations and improving industry is painting an unrealistic picture of an economy rising from the ashes. In my opinion- it’s simply not and has a very long way to go before we see any sustainable “recovery”. Over the past couple of days we have seen equities rise boosting commodity related products and risk currencies such as the kiwi and Aussie – this off the back of “feel good”. For example, Durable Goods Orders for July increased by 11.2% easily beating estimates of 4.4%.

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