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FX Update

FX News

Worldwide coronavirus cases surpass 30.3 million with over 950,000 official deaths.

New Zealand second quarter GDP turned out to be a big “wet fish”, coming in at -12.2% based on rough estimates of -12.0% predicted. The announcement had very little effect on the NZD broadly with most crosses fairly unchanged post announcement. The data however marks the biggest quarterly fall in New Zealand history with the deepest contraction on record. It puts the country formerly in a recession after first quarter GDP released down 1.6% earlier in the year. Most other economies have already announced their second quarter numbers with France almost -14%, UK posting a y/y drop of 21.7% and the US at -9.5% and Australia at -7.0%. The difference of rebounds in third quarter growth results should be dictated by coronavirus lockdowns and how governments have responded. In theory the NZ economy should bounce back hard towards year end and early 2021 as second wave lockdowns have not been as extreme as Australia for example.

The Federal Reserve maintained their cash rate at the 0% to 0.25% band as expected yesterday morning. Although they were generally dovish they said the financial situation had improved in recent months with better economic activity and employment.  The path of the economy will depend on the course of the virus, posing considerable risks in the medium term. The Fed vote was 8-2 in favour of “rates to remain” with the aim to achieve an inflation “average” over 2% with long term inflation expectations to be solid at the 2.0% mark. Long term forecasts (2023 and beyond) show 4.0% unemployment, 2.0% CPI with a commitment for the FED to keep rates at zero for some time. The question is, how much of this is priced into the recent bull moves in equity markets, commodities and risk assets? Possibly not a lot? With money remaining cheap for some time we could see “risk” products go a lot higher. NZD and AUD could benefit!?.     

  Key Points:

  • Jobs numbers in Australia continued to improve through August with 111,000 people added to the labour force, unemployment printed down at 7.5% from 7.8% expected but slightly up on July’s 7.4% 
  • The Bank of England voted 0-9 in favour of leaving the cash rate at 0.25% this morning. Until recently the central bank had ruled out cutting rates below zero but preparations are being made to allow the central bank to support the flailing economy by cutting rates to allow lower borrowing costs.
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