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NZ dollar benefits from possible US-China trade deal

Monday 14th October 2019

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The New Zealand dollar was higher after the US and China reached the first phase of a deal to end their trade war.

The kiwi was trading at 63.30 US cents at 8am from 63.36 cents late Friday in New York and 63.21 cents in Wellington. The trade-weighted index was at 70.34 from 70.40.

The so-called “phase-1” agreement between US President Donald Trump and China’s Vice Premier Liu He is intended to be inked when Trump meets with Chinese President Xi at the APEC leaders’ meeting in Chile in November.    

According to Dow Jones Newswires, President Trump said the US would call off planned tariff increases on Chinese goods next week while Beijing would buy US$40 billion to US$50 billion worth of American agricultural products - which China hasn't publicly confirmed.

The kiwi was “swept up by the ongoing risk-on tone filtering through markets, and benefits from a broadly weaker US dollar,” said ANZ FX/rates strategist Sandeep Parekh.

BNZ senior markets strategist Jason Wong said the deal challenges his assumption that the kiwi could fall to 61.50 US cents by the year-end but he stopped short of any upward revisions to his forecasts as the greenback is unlikely to tumble.  

The absence of the Oct. 15 tariffs reduces the need for an immediate move higher in the greenback against the Chinese yuan and “expected broader emerging market spill-overs, to which AUD and NZD have been so highly correlated all year,” he said.

However, he also notes that the “phase-1 agreement, if inked, does little to immediately brighten the outlook for global trade and growth, including inspiring a pick-up in business investment.” 

While it should prevent another rate cut from the US Federal Reserve this month “it doesn’t provide a firm pretext for significant or sustained US dollar depreciation,” he said.

“The US is set to remain the least dirty shirt in the global laundry and with a still formidable interest rates advantage,” said Wong. He also noted the poor outlook for the global economy means both the Australian and the New Zealand central bank’s may be forced down the path of near-zero interest rates.

Looking ahead, Parekh said markets will be watching for China trade data today. On the domestic front, the main event this week will be inflation data on Wednesday, in particular given that economists are expecting a November rate cut from New Zealand's central bank. 

The kiwi was trading at 50.17 British pence from 50.04 late Friday in New York. It was at 93.21 Australian cents from 93.17,  at 68.58 yen from 68.62, at 57.34 euro cents from 57.35 and at 4.4852 Chinese yuan from 4.4859.  


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