11.06.201911:05 Forex Analysis & Reviews: Markets grow due to lower tensions but will not help NZD and AUD

The message saying that the United States postponed indefinitely the introduction of import duties on goods from Mexico after successful negotiations, has supported optimism in global stock markets. Mexico has undertaken a number of obligations particularly, to reduce the migration flow in the United States.

The growth of markets is supported, including changes in expectations for the Fed rate cut. If a month ago the markets proceeded from a one-time rate cut in the current year, they are now waiting for two reductions and possibly three. The Fed's actions will launch a chain of effects around the world since the central banks of other countries, primarily commodity ones, will be forced to take measures to prevent the appreciation of national currencies.

A pause in the trade war between the United States and China contributes to a decrease in panic but this factor is temporary. There is no reason to wait for a compromise solution in the near future.

NZD/USD pair

Having reduced the rate to a record low of 1.5%, the RBNZ tried to form a chain of consequences that would lead to an increase in inflation. Firstly, a lower level of kiwi promotes the growth of import prices, which would lead to a decrease in imports and an increase in exports. Secondly, lower rates should revive the construction sector and ensure the inflow of investments, which in the end would lead to an increase in GDP with the first point and then to an increase in inflation. Thirdly, by itself, the growth of inflation expectations. All of these together should have had a positive effect on the rate cut.

However, in reality, all expectations are divided on expectations for a rate increase in the United States. The trade-weighted index (TWI) began to decline after the announcement of the RBNZ's intention to lower the rate but already half of the fall was played out on simple expectations of a reduction in the Fed rate.

As a result, the RBNZ has no choice but to announce another possible rate cut. This will help stop the growth of TWI. Otherwise, you can not wait for the positive effects for the New Zealand economy but the accumulation of negative effects will not disappear.

Kiwi has grown a little higher than we assumed in the previous review but the reversal is still forming. The decline in the price index for dairy products is protracted. Meanwhile, the RBNZ will seek to lower the NZD with the closest target of 0.6520 / 25 then to the area of 0.6495 and 0.6480.

AUD / USD pair

The NAB business environment index declined from 3p. to 1p. in May. , which is significantly below average. A decline was noted in all components. Retail trade was clearly in a recession and there was a weakness in the entire service sector. Despite the fact that the mining sector is on the rise, production as a whole is also falling. The volume of new orders is reduced and the capacity utilization is below average. Hence, the reduction in price pressure, which results to consumer inflation.

At the same time, the consumer confidence index rose sharply from 0 to 7. This happened after the confirmation from the RBA of the central bank's intention to lower the rate in June. Apparently, this surge of confidence is a one-time since a one-time rate reduction is not capable of significantly changing the situation in the economy. Also, the trend is clearly negative as shown by the dynamics of the business conditions index.

The current level of the RBA rate is at a record low for Australia at 1.25%. Following the accompanying commentary of the RBA, the reduction in the rate should contribute to employment growth and provide confidence that inflation will reach the target range of 2-3%. However, you can be sure that there will be no fundamental improvement in inflation given the extremely negative situation in the retail trade. This means that the chances of another rate cut until the end of the year remain high. According to the Ai Group, real GDP growth in Australia accelerated to 0.4% q/q. However, it remains noticeably lower than historically average levels, while this growth was largely supported by the export of raw materials, that is, a successful conjuncture, as well as an increase in government spending. The first of these two factors begin to decline as shown in the Bulletin of the Commission for Labor Productivity.

In the previous review, we assumed that the AUD/NZD growth is corrective and the Aussie will form a local peak in the region of 0.7025. Indeed, the Australian is declining after a small increase. The trend will remain at least until the FOMC meeting on June 19. The goal is to test the support of 0.6864 with the next target of 0.6844.