Kiwi declines on higher capital requirements’ fears

Summary:

• NZ dollar trades lower in early European trading as RBNZ stands pat when it comes to higher capital requirements

• A handful of information coming from ongoing US-China trade negotiations

• Lowe’s comments on monetary policy as well as more details regarding a China’s ban on imported coal from Australia

A rate cut scenario in New Zealand

The New Zealand’s dollar is by far the weakest major currency in the G10 basket in early European trading losing as much as 0.4% against the greenback. This fall came after the RBNZ said that proposals concerning an increase in capital requirements for local banks could lead to tighter monetary conditions that might require a cut to the official cash rate. Although this news is not new, the first time when it hit wires was December, it undoubtedly is adding to downward pressure on the kiwi as the currency is giving back its post-RBNZ gains. We mentioned this aspect earlier this week in our EURNZD recommendations. Then we wrote that “The central bank wants to create a new countercyclical capital buffer. The changes would raise capital requirements to 18% of risk-weighted assets from the current level of 10.5%.” Let us notice that an adjustment to possible higher capital requirements would be spread over 5 years for large NZ banks and over 7 years for smaller lenders. RBNZ Deputy Governor Geoff Bascand said overnight that the impact on economic growth is likely to be negligible because better capitalized banks should actually lend more. While these changes could boost confidence and then translate into livelier lending activity over the longer-run, they may be negative in the short-term as banks’ margins could be squeezed out barring a cut in the cash rate leading to lower borrowing costs for New Zealand’s lenders.

Technically the NZDUSD keeps moving lower and it could visit the demand zone localized in the vicinity of 0.6700. Source: xStation5

US-China trade talks

On Thursday we got the news that China was going to propose that it could buy an additional $30 billion a year of US agricultural products including soybeans, corn and wheat as part of a possible trade agreement struck between the world’s two largest economies. This kind of a deal, if reached, would be similar to that struck in December when the two countries agreed to a 90-day truce, however, this solution is unlikely to work over the longer-term. Meanwhile, “the Trump administration is counting on the Chinese leader’s special envoy, Liu He, to get Beijing to accept tough new strictures that are increasingly controversial in Beijing, according to a Wall Street Journal’s article.” This article points to deep gaps remaining between the US and Chinese negotiations over some fundamental issues underlying the current bilateral trade tensions. Note that we have yet to be offered any official announcement from the ongoing talks in Washington. Finally let us add that President Donald Trump plans to meet with China’s top trade negotiator on Friday afternoon.

In turn, Australia denied Reuters’ reports that China has banned its coal imports from the Antipodean country. On the other hand, Australia’s trade minister said that China was applying import quotas on coal equally to all states. He also added that China’s processing of coal imports may have slowed down. RBA’s Lowe suggested that China’s moves on Australian coal could probably not to have a dramatic effect on the local economy. According to our calculations Australia's coal exports to China account for roughly 8% of total coal, coke and briquettes exports.

The EURAUD looks as if it would be ready to erase its recent gains. The cross approached the supply zone on Thursday. Several time ago the similar move was reversed and the pair moved back. Source: xStation5

In the other news:

• Japan’s CPI rose 0.2% YoY in January after rising 0.3% YoY in December, core price ticked up