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US-China “Mini” Deal bolsters demand for risk

NZD - New Zealand Dollar

The New Zealand dollar advanced through trade on Friday, buoyed by a sustained period of risk appetite as negotiations between the US and China yielded a partial trade deal. A ‘mini’ trade agreement was announced on Friday, with China committing to purchase more US agricultural goods in exchange for the US suspending the next round of tariffs due to be implemented this week. The NZD followed the CNH higher advancing three tenths of a percent, while the USD fell across the board. Pushing through 0.6350 the NZD settled marginally lower into the close.

Attentions now turn to Wednesday’s quarterly CPI print. We expect a moderate read at 0.5% q/q and 1.3% y/y, well short of the RBNZ 2% target. That said softness across this read may not undo the recent upside gains. The overnight index swaps curve shows a 25-basis point cut in November is already priced in with a 50 basis point cut on the table. The NZD is reasonably well supported above the early October low at 0.62 and anything short of a complete miss in the CPI read will likely see this level hold through the short term.

Key Movers

Safe haven currencies fell through trade on Friday, with the USD, JPY and CHF all forced lower in the wake of the US-China trade agreement. The partial deal between the two economic superpowers bolstered markets appetite for risk as investors optimism a full-scale deal could be reach escalated. As global risk factors eased through last week commodity and emerging market assets found support while the USD marked fresh one-week lows.

Despite the recent uptick in trade optimism there are still significant structural barriers that must be overcome before a complete trade truce is reached. And while this most recent deal is a step in the right direction the underlying structural barriers are unlikely to be resolved in the near term which could weigh on risk appetite and ensure the recent upturn is short lived.

Sterling found support on increased expectations a Brexit deal will be reached. The pound pushed through 1.26 to touch 1.2683. Direction remains binary and tied to Brexit headlines with underlying economic indicators unlikely to have a significant impact on value leading through October and into the October 31 Brexit deadline.

Expected Ranges

NZD/USD: 0.6200 - 0.6380 ▲

NZD/EUR: 0.5680 - 0.5780 ▲

GBP/NZD: 1.9450 - 2.0250 ▲

NZD/AUD: 0.9305 - 0.9390 ▲

NZD/CAD: 0.8330 - 0.8430 ▼