04.06.201909:16 Forex Analysis & Reviews: Heading downward: NZD and AUD growth will be short

The focus is still on the US and Chinese trade war, which contributes to the reduction of macroeconomic data around the world. The US production from ISM fell yesterday to 52.1p, which was the lowest level in 2.5 years as the capital leaves the stock and commodity markets.

The market continues to focus on the US and Chinese trade war, which objectively contributes to the reduction of macroeconomic data around the world. The US Manufacturing from ISM fell yesterday to 52.1p, which was the lowest level in 2.5 years. On the other hand, the latest PMI data in Canada and the UK indicate a decline in indices below 50p, which is a shrinking sector. The capital is actively moving away from stock and commodity markets to safe-haven instruments.

NZD/USD pair

The Treasury published a report on the state of New Zealand's budget and all its indicators remained within the normal range even if government spending increased. In turn, this results in a smaller current account surplus and higher debt.

ANZ Bank in a monthly business outlook review notes that inflation expectations have fallen to their lowest levels since the beginning of 2017. The most pronounced decline in spending is noted in residential construction with investment at 5-year lows. Activity in the sector is rapidly declining despite supporting the sector in a tax scheme for construction firms but capital gains tax was excluded.

All of these against the background of population growth, which it would seem, should support the demand for housing at a high level. In theory, it is but the problem rests on the low growth rate of incomes of the population, which is a direct consequence of the deterioration of the labor market. The level of labor force participation fell to 67.5% in April, which is a two-year minimum.

The decrease in inflationary expectations is a consequence of a reduction in the key rate in May, while the RBNZ in the accompanying commentary explained that more incentives may be needed to achieve a target of 2%. In fact, this means recognizing that New Zealand's economy is slowing down and among other things, restoring the growth impulse requires a decline in the weighted average of the New Zealand dollar.

Thus, Kiwi expectations remain negative. The local minimum of 0.6479 formed at the end of May will be subject to verification in the coming days and an increase to 0.6604 on Monday is an excellent reason for sales from a higher level. Today, the price index for dairy products will be published. The dynamics are negative since February 2019 and if confirmed, the kiwi will go first to 0.6555/59 and then to the May lows with an eye to 0.6423.

AUD / USD pair

RBA expectedly reduced the interest rate by a quarter of a point to 1.25% at the meeting on Tuesday. The decision of the RBA was predicted and did not have a noticeable effect on the AUD rate.

Markets waited for the rate cutback in May but then the RBA took a pause. This decision is motivated by the need to get more data. Well, this data was not long in coming. Lending to the private sector (CAPEX) decreased by 1.7% in Q1, according to the ABS. It was mainly due to the mining industry and construction while weak growth is only observed in the service sector.

Moreover, the investment plans of companies for 201/20 are low and clearly show that companies are proceeding from the weak growth of the Australian economy. A preliminary estimate shows that investment may decline by 3.5% per year.

As in New Zealand, investment in housing construction is decreasing. The number of building permits in April decreased by 4.7%. Everything slows down. The PMI in the manufacturing sector decreased from 54.8p to 52.7p in May as the profit of companies decreased in the first quarter. The price index for raw materials decreased while inflation slowed down.

From a fall since April, the AUD undergoes a correction with an upward rollback by 38% on Tuesday morning. It can be assumed that the Australian will be able to rise to 0.7025 or 0.7075 on the effect of a weakening dollar. However, such a scenario is possible only if China shows confidence in the trade dispute with the USA. There is a slight chance for the formation of a local peak and a resumption of decline to 0.6840 and further since weakening AUD is objectively necessary to support the Australian economy, especially given that the growth of panic will lead to the departure of capital into defensive assets.