Several negative factors on Tuesday evening contributed to a sharp increase in demand for defensive assets and a fall in markets. The main event of which was the launch of the impeachment of US President Donald Trump in the lower house of the US Congress, initiated by the Democrats.
The second most important factor is the unexpectedly low Conference Board consumer confidence index, falling to 125.1p from the August level of 143.2p. It may indicate a decrease in inflation expectations.
As a result, the Asia-Pacific and European exchanges are trading in the red zone, while gold is again moving to the recent high of 1550. Oil is falling after the stock markets.
The impeachment procedure is unlikely to be developed but the aggravation of the internal political struggle in the USA coincides in time with the intensification of tension between the US and China. President Trump, speaking at the UN, said that he would not conclude a "bad deal with China" and used rather harsh rhetoric.
The demand for protective assets will increase and oil is in danger of a strong decline. Hard times are coming for commodity currencies.
NZD / USD pair
The Reserve Bank of New Zealand left the rate unchanged at 1.0%, noting that after the August decline there were no noticeable changes, and more time was needed to evaluate the consequences for the economy.
The RBNZ noted that the level of employment is approaching the maximum sustainable level, while inflation remains within the target range. As global risks remain elevated and inflation prospects are still unclear, the RBNZ did not see a reason for another reduction but reserved the right to expand incentives if necessary.
The pause is explainable and other positions. Over the years, the rate on bonds in New Zealand was higher than on American securities and finally, a turning point came. Now, the government can borrow less than the US government, which means that the probability of preparing tax incentives instead of monetary ones has increased.
It should also be noted that kiwi has lost its status as a reliable and profitable asset at the same time. Low profitability will reduce the demand for the New Zealand currency, which will help keep the kiwi rate at low levels.
The growth outlook for NZD still looks weak. In August, the trade balance has markedly decreased. If the decline in exports is largely seasonal, then imports are reduced primarily due to low domestic demand, which worsens already weak inflation expectations.
Kiwi's short-term positive reaction to the results of the RBNZ meeting has been worked out and the probability of a decline to 0.6254 remains high. On Friday, the ANZ-Roy Morgan consumer confidence index will be published, and then on Monday, the RBNZ business confidence index and a similar index from NZIER a little later. The dynamics will show whether the kiwi has prospects for recovery.
AUD / USD pair
The protocol of the RBA meeting of September 3 gave the markets a clear understanding of the Central Bank's intentions - the rate reduction will continue. Inflation in Australia is still well below the target range of 2-3% to 1.6%. Moreover, the RBA believes that "... it will take a long period of low-interest rates to make steady progress towards full employment and achieve a more guaranteed progress towards the inflation target."
According to forecasts, employment growth may slow down by the end of 2019. The dynamics of the PMI indices remains negative despite the fact that preliminary data in September for the services sector showed an unexpected increase to 52.5p.
The growth is possibly a consequence of the implementation of tax incentives, but regarding the fundamental indicators of the economy, the PMI in the manufacturing sector decreased to 49.4p. It is a response to the growing signs of a global recession and a slowdown in the trade as it occurs against the backdrop of a weakening Australian dollar, which reinforces the negative result.
The RBA recently revised the unemployment rate. Hence, we can expect the wage growth to accelerate and the results show that Australia's labor market could tighten without noticeable pressure on inflation. In sum, this gives another negative factor in favor of the fact that the RBA will continue to cut rates. Similarly, this is exactly how most large banks explain the development of the situation. This step is likely to take place in November, which creates pressure on the Aussie. The support zone of 0.6674/86 should fall, after which it is highly likely that the bears will try to develop pressure up to an 11-year low of 0.60.