By Mike Houlahan, Senior Foreign Exchange Dealer, Auckland, NZ
Australian Dollar - Quarterly Review
The Australian Dollar has remained under pressure over the course of the first quarter. Ongoing concerns about the trade war between the USA and China as well as concerns about falling house prices in Sydney and Melbourne have also weighed on the outlook.
The trade war looked like it would be resolved by late March and the AUD did stage a brief rally on this prospect but no deal was reached and the AUD slipped back to the lower end of the range. Expectations remain that the trade war will reach a favourable conclusion, but the currency market has not priced this into the AUD at this stage.
There are some tentative signs that the sharp drop in house prices in Sydney and Melbourne is stabilising with the number of days to sell shrinking quickly. Housing markets are slow markets but the market has seen a barrage of negative headlines over the last few months so any good news will come as a surprise to the market.
Due to the weakness in house prices the market is forecasting two interest rate cuts from the Reserve Bank of Australia, but they are not talking about rate cuts at this stage.
One bright spot has been the relative strength in Australia’s main commodity prices with both Iron Ore and Coal prices holding up well. In fact, Australia has recorded a AUD 10.0 billion trade surplus over the last three months.
The labour market has also held up well despite the slowdown in housing as infrastructure spending continues to provide a good base of support for the economy.
The next general election is due in May and the RBA may remain on hold until after the election.
The Budget for Australia is due on 2nd April and strong commodity prices are expected to see the Government forecast a A$10.0 billion surplus which will most likely be offered to voters in the form of tax cuts to help see the current government re-elected.
New Zealand Dollar - Quarterly Review
The NZ Dollar has traded in a choppy range over the first quarter of 2019. The choppy trading was largely attributable to the mixed signals from the Reserve Bank of New Zealand who were more hawkish back in early February only to turn super dovish by the end of March. A sharp slowdown in housing in the wake of the proposed Capital Gains Tax has caused the RBNZ to do a U-turn. Interest rate cuts are now expected over the next few months with many commentators now seeing the first rate cut in May.
House sales have plummeted in Auckland, and on an annual basis, Auckland house prices are now falling. Record new supply of both houses and apartments look set to test the demand of first home buyers as investors step away from the market due to the prospect of Capital Gains Tax in the future.
The NZDAUD rate rose to elevated levels over the quarter as the market priced in a steady cash rate for NZ and rate cuts for Australia. However as we go to press the NZDAUD cross rate is being re-rated back towards more realistic levels.
On a positive note Dairy prices have held up well although this has been supported by extremely dry growing conditions which will weigh on late season production. In fact export intentions have dropped back to Financial Crisis lows in the latest ANZ business confidence survey.
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