Antipodean currencies in retreat following gloomy data

Summary:

• NZD and AUD lead the losses in G10 this morning while the US dollar climbs across the board
• Australia reported disappointing data regarding construction work done in Q2
• RBNZ’s Orr calls on businesses and governments to bump up investment

A role of fiscal policy

A quick glance at the FX market shows that the New Zealand dollar is the largest loser this morning being down all but 0.5% against the greenback. Moreover, going back several weeks in turns out that the kiwi has lost more than 6% to its US counterpart, roughly 2 percentage points more than the Aussie has declined at the same time. Today, the New Zealand’s dollar has got a double whammy. First of all, market sentiment does not look well and the Aussie dollar is also declining (in response to a grim macroeconomic reading). On top of that, we also had a speech from RBNZ Governor Adrian Orr who suggested that small and open economies like New Zealand had to particularly pay attention to the exchange rate given its impact on competitiveness. He also reiterated what other central bankers have been talking for some time that “there are limits to what central banks can achieve with their tools, and if operating alone,'' adding that monetary policy needed to be supported by fiscal policy, structural economic policy as well as investment coming from businesses. As of today, market-based expectations point to almost 70% chance for a rate cut in New Zealand when the RBNZ meets in November. That means that a bar to surprise markets once again and push to kiwi much lower seems to be placed quite high. Moreover, let us notice that New Zealand, as many other countries, has quite a solid fiscal position with a 0.1% of GDP general government surplus at the end of 2018.

The NZDUSD keeps moving down with the major target localized at around 0.6230. Source: xStation5

Gloomy construction data

While the kiwi is leading the losses in G10 this morning, the Aussie dollar is the second worst performing currency and this underperformance seems to result from the gloomy data regarding construction work done for the three months through June. During this time construction work done fell 3.8% QoQ  in constant prices with both private and public sectors contributing to this decline. The details showed that construction of residential buildings plunged 9.6% YoY, non-residential buildings declined 3.3% YoY and engineering plummeted 15.9% YoY. Moreover, looking at the 4-quarter rolling sum and its dynamic, in order to capture changes in the underlying trend, it turns out that the YoY decline during the past four quarters was the deepest since the end of 2001. This release has undoubtedly damped expectations for a GDP print due next week and it could even strengthen the case for further rate cuts there. As of today, one may notice that market participants are almost convinced that we will see another cut by the year-end assigning roughly 90% chance for such a scenario.

Construction data from Australia came in well below expectations lowering expectations before the GDP release next week. Source: Macrobond, XTB

In the other news:

• WTI oil prices keep rising following an unexpected 11.1 million barrels decline in stocks last week, according to API

• China explores ways to gradually loosen or even remove car-purchase limits, a move which would support new-energy vehicle purchases in some areas and encourage to build more gas stations in rural areas