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NZ dollar bounces off its lows after Trump's China trade scare

Monday 6th May 2019

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The New Zealand dollar firmed after starting the day sharply weaker on US President Donald Trump’s threat to raise tariffs on Chinese goods just as the two nations were nearing a trade agreement.

The kiwi was trading at 66.23 US cents at 5pm, up from 66.03 at 8am but down from 66.44 in New York on Friday. The trade-weighted index rose to 72.41 points from 72.12.

“The trade deal with China continues, but too slowly, as they attempt to renegotiate. No!” Trump tweeted after threatening to raise tariffs currently at 10 percent on US$200 billion worth of Chinese goods to 25 percent on Friday. It was only last Friday that Trump had said the two nations were nearing a deal.

Not to be outdone, China’s Vice-Premier Liu He let it be known he is considering cancelling his trip to Washington, including a 100-person delegation, which had been scheduled for Wednesday.

“The price action in kiwi trading today has been all about China,” says Mike Shirley, a dealer at Kiwibank.

After the initial sharp reaction the market had steadied. It began recovering, with many thinking they had over-reacted to Trump’s tweet, only to be knocked by the Chinese reaction.

Shirley says there was also a blip after Treasury forecast a slight dip in GDP relative to its previous forecasts.

“That was a bit of noise in that much bigger China trade story,” he says.

Treasury said partial indicators and weak business confidence suggest New Zealand's economic growth has been throttled back and may be lower than it forecast in the December half-year update.

China is New Zealand’s largest trading partner and its economy has been suffering as a result of the trade war with the US. Although it has been responding to government stimulus, the economy remains fragile.

The market is also awaiting monetary policy decisions by both the Reserve Bank of Australia, due tomorrow at 4.30pm, New Zealand time, and by the Reserve Bank of New Zealand, due on Wednesday at 2pm.

Shirley says the market pricing has the odds of an Australian rate cut shortening and is now just below 50 percent. The odds of a cut in New Zealand are just above 50 percent.

The median in a Bloomberg poll of 17 economists also points to a 25 basis-point rate cut in the official cash rate to 1.50 percent on Wednesday, although many of those polled say it’s a line-ball call.

The New Zealand dollar was trading at 94.75 Australian cents from 94.71, at 50.46 British pence from 50.24, at 59.17 euro cents from 59.14, at 73.39 Japanese yen from 73.02 and at 4.4875 Chinese yuan from 4.4463.

The New Zealand two-year swap rate fell to 1.6120 percent from 1.6197 on Friday while the 10-year swap rate edged down to 2.1650 percent from 2.1875.


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