Markets eyeing two votes, BNZ sees +4.2% pa Q2 NZGDP, RBNZ tone to be closely watched

By Raiko Shareef

NZ Dollar

The NZD benefitted from a mild USD sell-off on Friday, rising 0.2% against the USD to 0.8330.

Very little report from the local session on Friday. The only local data was the Q2 wholesale trade figures, which rose by 1.8% q/q, higher than we had expected (no formal poll).

While the market did not budge, this number feeds into our pick for Q2 GDP, due next week. We are picking a 1.0% q/q rise, for an eye-watering annual gain of 4.2% y/y.

This morning GBP sell-off has NZD/GBP 0.7% stronger at 0.5140, reversing the trend decline in the cross seen since early July. The risk is that this move could extend, heading into the Scottish referendum (18 Sept). We expect the cross to fall to 0.49 by year-end, with our forecasts based on Scotland remaining part of the UK.

The sharp uptick in investor caution with regard to Scotland reminds us as that political risk is very much alive and well in currency markets. This is relevant for the NZD heading into our own General Election.

We would expect (milder) downward pressure on the currency, should the polls continue to tighten.

This week, the RBNZ meeting will be the local highlight. We expect the Bank to strike a less hawkish tone, while attempting to convince investors it remains committed to normalising the OCR.

This should keep downward pressure on the NZD.

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Majors

The USD gave back some of its gains on Friday, after US labour market disappointed. Equities benefitted from a ceasefire declared in the Ukraine. A fresh poll shows Scotland is moving closer to independence, which weighed on GBP at the open this morning.

US non-farm payrolls grew at just 142k in August, with downward revisions over June and July making it a decidedly soft reading. The unemployment rate dipped to 6.1% as expected, but that was flattered by a 0.1% rise in the participation rate to 62.9%.

The fall-out from the weaker-than-expected outturns was very limited, with both the narrow US Dollar Index and the broader Bloomberg Spot Index losing just 0.1%. Analysts generally pushed back against the notion that this would derail a Fed looking to balance its language (from dovish) at next week’s FOMC meeting. We expect the USD to consolidate (if not build) on its gains heading into that meeting.

In the Ukraine, the Kiev government and pro-Russian separatists agreed to a ceasefire on Friday. Despite reports of sporadic outbreaks of fighting, it looks to be holding. Bloomberg reports that both sides agreed to hold their fire, exchange prisoners and allow access to supply convoys (from Russia) to the Donetsk and Luhansk regions. There is no agreement as yet on the retreat of Russian or Ukrainian forces, or the disarmament of ‘volunteer’ battalions on either side. The immediate fate of the plan to step up sanctions against Russia as agreed in principle by Western powers last week is currently unclear. This news helped to stem a slide in European equities. The Euro Stoxx 50 closed effectively unchanged, after being 0.5% lower earlier in the session.

Over the weekend, the UK Sunday Times published a new YouGov opinion poll ahead of the Sept 18 referendum on Scottish independence.  Excluding undecided voters, this shows the ‘Yes’ camp (pro-independence) support at 51%, with 49% for the ‘No’ camp. This weighed heavily on GBP at the open this morning, opening 0.9% lower at 1.6180. This reflects investors pricing in significant economic and political uncertainty, including the thorny issue of whether an independent Scotland would retain the GBP. All the major political parties in London said that it would oppose that motion. The pro-independence camp says it would refuse to pay its share of the UK national debt if it did not get to retain the GBP.

This week ahead is set to be much more staid, after last week’s fireworks. In our neck of the woods, Australia’s labour market report will be of intense interest, given last month’s jump from 6.1% to 6.4%. We also have China’s monthly data scattered through the week, kicking off with trade data today.

Further afield, industrial production data for the UK and the euro-zone will be highlights (speaking to the relative dreariness of the week). In the US, the U of Michigan survey and retail sales are due. Largely, though, we expect the USD to be fairly range-bound ahead of the FOMC next week.

All its research is available here.