Image © Adobe Stock
The New Zealand Dollar could be on the cusp of reversing recent gains.
A soft domestic outlook and a sense that we're running out of good news on the trade war front are forcing a consolidation in the NZ Dollar, which could indicate a recent rebound is over.
Stocks and commodities are softer in midweek trade, as is the U.S. Dollar. The New Zealand Dollar is softer against European currencies but holds a gain on the U.S. Dollar, suggesting some element of the 'sell America' trade is at play.
(When stocks and USD fall in tandem, it indicates the USD is not benefiting from its safe haven characteristics and points to an idiosyncratic concern, such as a loss of confidence).
This trade sees the USD fall and European currencies benefit. However, it also sees currencies that have a strong link to commodity price performance struggle.
The NZD is one such commodity currency, and it is softer on the day alongside its peers in this basket.
"The highly uncertain nature of the outlook in itself creates uncertainty, which fuels a level of risk-aversion particularly evident in commodities markets and commodities currencies, still limiting their gain when positive developments do occur," says Annabel Bishop, an economist at Investec.
The Kiwi and commodity currency basket benefited through late April and early May as the U.S. indicated the April 02 'Liberation Day' tariffs were a starting point for negotiations, and that the ultimate levels would be far lower.
Above: GBP/NZD at daily intervals.
Gains culminated in this week's Sino-U.S. announcement that a trade accord had been reached.
"Rowing back from the high water mark on tariff rates helps but we’re not going all the way back to pre-Liberation Day levels, even if other deals are done in this 90-day pause window on reciprocal tariffs," says Sam Hill, Head of Market Insights at Lloyds Bank.
A sense that the good news 'is in' could scupper further NZD gains. "We would look to take profit as trade/economic optimism looks well priced," says Noah Buffam, a strategist at CIBC Capital Markets.
"The highly uncertain nature of the outlook in itself creates uncertainty, which fuels a level of risk-aversion particularly evident in commodities markets and commodities currencies, still limiting their gain when positive developments do occur," says Bishop.
She explains that trade agreements have not been nailed down in all cases to reduce or largely eliminate ‘Liberation Day tariffs’, and so a high degree of uncertainty prevails, limiting the recovery in commodities prices, and so in commodities currencies.
Even if global concerns about trade fade further, the New Zealand economic outlook is a potential headwind for the Kiwi.
New research from Barclays says:
"New Zealand is still feeling the negative effects on demand from a more restrictive monetary policy. The RBNZ policy rate is now at the top of its neutral range of 2.5-3.5%, with a bias towards more easing.
"We think the economic backdrop means risks are tilted toward the RBNZ's cutting below the midpoint of this range and possibly into accommodative territory, which would be a drag on the NZD."
The next Reserve Bank of New Zealand interest rate decision falls on May 28. Further rate cuts, or guidance that rates will fall further, tend to weigh on a currency.
Should economic data deteriorate on the back of recent trade war-induced uncertainty, the RBNZ could signal a willingness to cut deeper, prompting renewed NZD weakness.