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NZ little changed against greenback, sharply higher against China's yuan

Monday 5th August 2019

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The New Zealand dollar was little changed against the US dollar after initially plunging with China’s yuan after US President Donald Trump escalated the trade war between the two nations.

The domestic currency then bounced back after hitting key support levels and after the People’s Bank of China made soothing noises about wanting to keep the yuan stable, suggesting China doesn’t intend to use its currency as a weapon in the trade dispute.

The New Zealand dollar was trading at 65.21 US cents at 5pm in Wellington, having fallen as low as 64.87 early afternoon from 65.28 at 8am. But against the yuan, it was trading sharply higher at 4.5823 from 4.5296.

Peter Cavanaugh, the senior client advisor at Bancorp Treasury Services, says China’s central bank set the yuan’s reference rate at 6.9225 US cents today from 6.8996 on Friday. The market took it above 7.02 US cents, the first time it has traded above 7 cents in a decade.

“The market is positioning for a Chinese response” to Trump’s announcement last week, Cavanaugh said. Trump said he will impose a 10 percent tariff on an additional US$300 million of Chinese imports from Sept. 1 on top of the existing 25 percent tariff on US$200 million of Chinese imports.

The new tariffs are expected to push up the prices of a wide swathe of US consumer goods.

“In terms of tariffs, the Chinese have got no ammunition left so the only logical courses are to order no imports of US goods or to weaken the yuan,” Cavanaugh says.

However, the People's Bank of China said in a statement that it “has the experience, confidence and capability of keeping the yuan's exchange rate basically stable at a reasonable and balanced level,” according to a report from the official Xinhua news agency.

Mike Shirley, a dealer at Kiwibank, says “they’re stating that they don’t intend to use the currency as a trade lever.”

In any case, “around the 65 US cent level, there was a reasonable amount of noise. It’s a key resistance point for the New Zealand dollar,” Shirley says.

However, China is retaliating against Trump by today ordering state-owned enterprises to suspend imports of US agricultural products, according to Bloomberg News.

It says bureaucrats in Bejing had been “stunned” by Trump’s latest move, which came just after the two nations had resumed trade negotiations after reaching an impasse earlier this year.

Shirley says the market is likely to focus on a scheduled speech early tomorrow, local time, by Federal Reserve board member Lael Brainard for further clues as to Fed policy thinking. The Fed cut interest rates last week but said it wasn’t the start of an easing cycle. 

Also tomorrow, local June-quarter employment data will be released. The market is expecting the unemployment rate to tick up to 4.3 percent from 4.2 percent in the March quarter, the participation rate to rise a little and for reasonable wage growth, although this will largely reflect increases in the minimum wage.

The Reserve Bank of Australia will review its interest rate settings tomorrow but isn’t expected to cut rates, unlike the New Zealand Reserve Bank which is expected to cut its official cash rate on Wednesday to a record low 1.25 percent.

The New Zealand dollar was trading at 96.14 Australian cents from 96.07, at 53.64 British pence from 53.79, at 58.16 euro cents from 58.77, and at 69.13 yen from 69.57.  The trade-weighted index was at 72.44 points from 72.25.

Wholesale interest rates fell sharply and hit record lows yet again. The New Zealand two-year swap rate fell to a bid price of 1.1652 percent from 1.1953 on Friday while the 10-year swap rate eased to 1.4750 percent from 1.5400.


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