Asian trading session opened the week in the green zone, but this is a technical movement caused by the weakening dollar, as more and more confidence is growing in the markets that the Fed will not be able to stop the threat of a new recession only by lowering rates, and therefore, the large-scale infusion of new liquidity by the Fed has signs of a fundamental reversal.
The mechanism to weaken the dollar was triggered by the failed ISM reports and a quick reaction to the lack of liquidity by the Fed, which showed that the chain of causes and effects could be interpreted differently than previously thought. The production in the United States is declining, a reduction in the tax burden has led to an increase in the budget deficit, a tariff war cannot fix the situation. Therefore, both lowering rates and a new stimulus package are perceived as inevitable.
This week, the dollar will continue to move down.
NZD/USD
The inflation report for the 3rd quarter which was published last week increases the chances that the RBNZ will lower the rate by a quarter point at the November meeting, which will put pressure on the NZD rate. Despite the fact that inflation grew by 0.7% with a forecast of growth of 0.6%, annual growth slowed down from 1.7% to 1.5%, and the medium-term inflation forecast began to look much weaker.
Given that the overall inflation rate is currently 1.5%, expectations on inflation run the risk of dropping below 2% again. Low inflation expectations, in turn, will exert increasing pressure on inflation (which affects wages), which will actually raise real interest rates, tightening monetary conditions. In conditions when the RBNZ's ability to reduce rates is limited, the risk of unconventional actions by the financial authorities increases. The purpose of which will be large-scale economic support. On the other hand, forward indicators, the study of which was conducted by ANZ Bank, suggests a larger scale decline than the current RBNZ forecast.
In general, all major risks for New Zealand remain stably stable. GDP growth is slowing, so further cuts are expected to ease financial conditions. More so, the labor market is still stable, but the inevitability of rising unemployment and a slowdown in wage growth are increasingly being emphasized in economic reviews of system banks. Expectations for a rate during the year are at the level of 0.25%, which implies 3 more reductions, and, of course, inflationary pressure tends to decrease.
Wherever you throw, there is a wedge everywhere. The Kiwi rose last week, but the impulse of this growth is exclusively external, and is based both on positive expectations for US and Chinese trade negotiations, and on the general weakness of the dollar, which raised all other currencies up. Today, the continuation of the trend is more likely, the support is the upper border of the channel 0.6370/80, broken the day before by the target-a strong resistance zone 0.6440/50. We continue to assume that the growth of the New Zealand dollar is situational and is not supported by objective macroeconomic data.
AUD/USD
The total employment in Australia for September increased by 14.7 thousand, the unemployment rate fell to 5.2%, and the labor market as a whole is stable and does not cause much concern. At the same time, the confidence index from NAB fell sharply to -2p, while steady growth was expected, that is, there is no optimism about the prospects for the Australian economy, despite historically low interest rates. It is expected that consumption growth will remain weak and the decline in housing construction will continue. Against this background, the low level of new investment in business only confirms the trend.
On the other hand, inflationary pressures remain low, retail prices are not convincing, and production prices are rising at below average rates. Attempts to stimulate demand by lowering tax pressure did not bring the expected results.
On Wednesday, the updated PMI will be published, while the markets are dominated by favorable sentiment, the Australian currency will continue to win back the positive, and growth may continue in the short term. The support is 0.6830 / 40, while the target is 0.6895. The passage in the next two days is quite likely.
