Risk Off: Just In Time For RBNZ
Kathy Lien | May 07, 2019 04:54PM ET
All of the major currencies traded sharply lower Tuesday as the Dow Jones Industrial Average tumbled more than 400 points. Investors are finally growing nervous as the clock ticks toward President Trump’s Friday deadline on Chinese tariffs. Equities and currencies turned lower, led by the slide in USD/JPY. Although China is proceeding with trade talks, the deadline’s proximity means Trump is more serious than ever before. The chance that the tariffs will come to fruition is greater than 50% and when they are made official, we’ll see renewed losses in currencies and equities. The greenback’s gains against all of the major currencies Tuesday (except for the Japanese yen) is a sign of risk aversion – a sentiment that should drive FX flows throughout the week.
The Australian dollar took the risk in stride because the Reserve Bank of Australia left interest rates unchanged last night. In Monday’s note we argued that the RBA would forgo a rate hike and that was exactly what happened. However despite the rise in the Australian dollar, the RBA statement was more cautious than optimistic. The central bank said that inflation in the March quarter was noticeably lower than expected. There’s still further spare capacity and more jobs improvement is needed to meet their CPI target and the main domestic uncertainty is housing. Even though RBA had nothing good to say about the economy, AUD still traded higher because investors were positioned for a cut, but from the RBA statement it's clear that the central bank is worried about the outlook for the economy. Although retail sales and trade beat expectations, both reports were weaker than the prior month. Chinese trade numbers were scheduled for release Tuesday evening and while recent data has shown some signs of stabilization, softer numbers could send AUD and NZD down quickly.
The Reserve Bank of New Zealand is up next and like the RBA, they have a lot to be worried about. Aside from President Trump’s threat to imposed 25% tariffs on $200B worth of Chinese goods this Friday, the economy weakened significantly since their last policy meeting. Since March, credit card spending is down, labor market, service, manufacturing and housing-market activity softened. The trade balance is much higher but inflation is lower. Back in March, the RBNZ shocked the market when they said a rate cut is more likely now than a hike as the balance of risks shifted to the downside due to lower business sentiment and a more pronounced global downturn. At the time, NZD/USD experienced its strongest one-day decline in 7 weeks and could fall further if the central bank reaffirms their dovishness. Technically, NZD/USD is in a downtrend and is poised for a move down to support at 65 cents.
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For EUR/USD, 1.12 has become a challenging resistance level made more difficult by a weaker-than-expected increase in German factory orders. German industrial production numbers were due Tuesday evening and the risk was to the downside after Tuesday’s report. Meanwhile, stronger Canadian IVEY PMI numbers failed to help the loonie, which remains in a strong uptrend above 1.34.
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