Pause in USD
FX markets have paused their aggressive demand for USD. Perhaps there is trepidation ahead of today’s release of the first estimate of US 1Q GDP. Assessments of economic activity in 1Q have shifted widely in the last couple of months, reflecting changing views on consumer spending and outlook for global trade. Markets are forecasting an increase of 1.8%, yet balance is for an upside surprise in our view. While this growth read will be the slowest in nearly two years, it remains a solid number. Deeper slowdowns will have analysts quickly point to the flat yield curve and calling for late 2019, early 2020 recession. However, in our view, there needs to be a shock to the labor markets, which paralyze consumer spending before considering consecutive quarters of negative GDP growth. Low unemployment at 4.0% and a steady improvement in wage growth (accelerated from 3.4% to 3.8% over the last year) will protect from temporary shocks. However, the strong labor market also creates a risk, should regular restructuring of blotted headcount, triggers wider layoff worries. Yet, even this feels a distant risk. In the current macro backdrop, we remain constructive on the USD against G10 based on the solid economic outlook, corporate earnings driving stocks and wide interest rate differentials.
While in the EU, concern near term will likely be on the Spanish general election. Spanish parliament will likely become further fragmented with the balance of power shifting to the socialist PSOE. Despite heavy short Euro positioning, improvement in eurusd is unlikely without a fundamental shift.
Kiwi in gain as trade data surprise
After plunging more than 1.36% in the past three days against the greenback due to disappointing consumer inflation figures from its Australian counterpart and having faced a similar drawdown earlier, the New Zealand dollar is reversing the trend, bouncing against major G10 currencies as Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr speech eased fears of growth slowdown. Furthermore, March trade surplus came highest in eight years, which gave currency traders good reasons to start a bullish turn – but risk of further drop is very likely.
Although a monthly trade surplus of NZD 922 million (consensus: 131 million) largely surprised to the upside with exports up 19% (NZD 899 million) and imports down 3.50% (NZD 174 million) compared with March 2018, it appears that the recent bounce is more of a special case. China’s imports of milk, logs, beef and lamb increased by 52% compared to prior year while 12-months exports accelerated by 20.80%, suggesting that trade with top export partners are improving. Yet despite a healthy labor market, April consumer confidence at 13-months high and a solid fiscal situation, it is very likely that the RBNZ will be following RBA’s footsteps by cutting its official cash rate by 25 bps during its 8 May 2019 monetary policy meeting. Headline inflation came at 1.50% in March, dropping from 1.90% in February.
As trading is currently limited in Australia and New Zealand due to bank holidays, we expect both the Aussie and Kiwi to remain under the influence of upcoming US GDP data while further declines are probable ahead of central bank policy meetings. Currently trading at 0.6651, NZD/USD is heading along 0.6620 short-term.
