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NZD weaker on China-US trade jitters; focus on RBA, RBNZ

Tuesday 7th May 2019

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The New Zealand dollar weakened amid jitters over the US-China trade negotiations and ahead of monetary policy decisions in Australia and at home. 

The kiwi was trading at 66.08 US cents at 8am, down from 66.23 at 5pm yesterday. The trade-weighted index fell to 72.17 from 72.41.

The US dollar rose as the renewed trade tensions between the US and China spooked markets. Reports that a delegation from China will proceed with trade negotiations in the US this week helped steady sentiment. 

According to the South China Morning Post, China is still preparing to send a delegation to Washington for the trade talks despite the latest threats by President Donald Trump to increase tariffs, Foreign Ministry spokesperson Geng Shuang said. 

The focus will now be on the Reserve Bank of Australia rate decision later today.  According to market pricing, there is a 50 percent chance the RBA could move to cut rates to 1.25 percent from 1.50 percent.

ANZ Bank expects the RBA to cut the cash rate by 25 basis points in response to a worrying fall in core inflation seen in the first quarter, despite a decline in unemployment.

If they do cut rates across the Tasman, it will increase the likelihood that the Reserve Bank of New Zealand will also cut interest rates to 1.50 percent from 1.75 percent on Wednesday afternoon. 

The odds of a cut in New Zealand are currently around 60 percent, according to BNZ Bank.  

"The only thing one can say with any confidence about this week’s Monetary Policy Statement is that market pricing will move on the day.... just after 2.00pm on Wednesday the movement in yields - and, potentially, the NZD -  will be significant. The question is, in which direction?" said BNZ head of research Stephen Toplis. 

Toplis said the best approach for New Zealand's central bank "is to keep interest rates on hold while formally building in an easing bias into its rate track. For all intents and purposes, this would be a time-buying exercise which would: limit the chances of the RBNZ making a policy mistake; increase the chances of a rate cut being impactive if it was eventually utilized; minimize future market volatility." 

The New Zealand dollar was trading at 94.37 Australian cents from 94.75, at 50.45 British pence from 50.46, at 58.96 euro cents from 59.17 at 73.26 Japanese yen from 73.39 and at 4.4671 Chinese yuan from 4.4875.


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