Trade escalation scares … everyone.
Markets remain shaky at the start of the trading week. Asia equities were lower across the board, pricing in higher trade tensions triggered by recent events. Last week, both China and President Trump, in a sudden escalation, announced new tariffs. President Trump, via tweet (per usual), announced additional tariffs on Chinese including 5% tariffs on $550 billion of Chinese imports. In an unprecedented declaration, Trump suggested to American companies to explore relocation options. Indicating that utilizing the broad power of the International Emergency Economic Powers Act of 1977 could force American companies to changes business strategy. In our view a worrying expansion of US presidential power. China released details for retaliation tariffs on roughly $75bn worth of US exports, including soybeans, oil, automotive and a variety of agro-products. The reactions from China against the US decision to impose higher tariffs were expected, just not so soon. As expected, that Trump’s trade tweet spooked the market, resulting in a flight to safety supported safe-haven assets: US treasuries yields fell, CHF and JPY gained while USD weaker against g10 peers. Gold rose to a new multi-year higher at $1555. The market raised the probability of the Fed cutting 50bp in September by about 8pp to about 60% probability.
Market and business’s new sensitivity to trade war developments has opened another dimension for potential crises outside geopolitics. Central Bankers now need to hit a rapid and discretionally moving target. Highlighted in Fed Chairs’ speech at the Feds annual symposium in Jackson Hole, Wyoming trade uncertainty is now shaping monetary policy. Since Trump is making it up “on the fly” unexpected changes creates challenges for policy setting. Only minutes after Trump tweet on China, Powell stated: “Trade policy uncertainty seems to be playing a role in the global slowdown and weak manufacturing and capital spending in the United States.” And continued noting, “we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.” Fed Chair Powell provided a balanced speech but made is clear the largest single factor driving policy, is trade tensions (both current and future). While the data might not warrant a cut, uncertainty around trade pushed the FOMC forward. Overall according to Fed Chair Powell the risks to the outlook had increased since the July FOMC meeting, supporting rising expectation of more than 25bp cut in September.
NZD in decline as trade headlines resume
Unlike its peer currency, the Aussie, the Kiwi faces the direct consequence of a resumption of trade rhetoric, falling by over 0.50% while AUD appears more robust. Yet the surprising trend disparity of both currency pairs is also explained by the recent release of poor trade data from New Zealand while the recent growth forecast downgrade from Westpac concerning the New Zealand economy also supports the decline. Overall, risk-off sentiment should favor a bearish bias for commodity currencies.
July trade deficit came stronger than expected, pointing to NZD -685 million (consensus: NZD -254 million), with exports rising slightly at NZD 5.03 (prior: NZD 5.01 billion) and imports up NZD 5.71 billion (prior: NZD 4.63 billion), highest since November 2018 due to growing demand for capital goods. Meanwhile, the recent growth cut released by Westpac New Zealand for FY 2019/20 towards 2.10% (prior: 2.30%) and 2.30% (prior: 3%) respectively, pointing to more conservative figures than RBNZ’s 2.70% and a surprising 2.40%, despite the expected upcoming monetary and fiscal stimulus from the coming quarters. In this regard, the RBNZ is expected to maintain its dovish bias after RBNZ Governor Adrian Orr announced a 0.50 percentage point cut of the Cash Rate to an historical low of 1% during the August Monetary Policy Meeting, stating a worsening economic outlook and subdued inflation. Therefore, future measures of the RBNZ are likely to be similar to those of the RBA, consisting of following the Fed’s footsteps, with a possible rate reduction at the policy meeting on 11 November 2019, suggesting that the Kiwi downtrend should continue, as the economic slowdown is also likely to affect the labor market near-term.
Currently trading at 0.6375, NZD/USD is heading along 0.6365 short-term.
