Afternoon analysis 26.09.2016

New Zealand’s export is the weakest it has been in two years. The country’s strong currency increased the trade deficit. Speculations regarding changes within the Polish government caused the zloty’s exchange rate to be more volatile.

Decrease in milk’s export continues to increase deficit

In Friday’s afternoon analysis, we took note that a stronger New Zealand dollar (kiwi) has a negative impact on export, as well as New Zealand’s trade deficit. If the market consensus regarding the current export fulfills, this would be the worst result since August 2014. Eventually, the data appeared to be worse. This concerns export, as well as the trade deficit.

A weak export of powdered milk in August (the worst level in seven years) had the largest impact on the deterioration of export. There was a decrease in value, as well as the amount of sales in each country, that imported this product. The largest decrease has been quoted in the case of China and the United Arab Emirates (50%).

What’s interesting, is that import went to its highest level since November 2015. This was a result of a stronger currency, which causes import to quote definitely better results. Despite such a weak level of export in August, the deficit in annual interpretation was at the level of 3.1 billion New Zealand dollars. This is only slightly more than it was in July because of the relatively large level of export during the past three months.

The above data confirms the anxieties from the Reserve Bank of New Zealand (RBNZ) included in its previous announcement (from September 22nd). It stated that the current exchange rate is harmful for export (as well as sectors which compete with import) and that it’s necessary to continue the monetary easing, in order to put inflation at its target (2% +/- 1%).

The RBNZ’s main problem is the real estate market. This market’s inflation remains too high and as a result, endangers financial stability. The Bank admits that cautiousness methods, as well as more strict credit conditions do not bring the expected results. Therefore, we may assume that the RBNZ would gladly decrease interest rates (currently 2%) in order to improve the trade balance. However, this won’t happen until inflation in the real estate market decreases.

Zloty is working-off its losses

The Polish currency began working-off a portion of its losses from the morning. The EUR/PLN went back below the 4.30 level. There is no official information regarding the Minister of Finance, Paweł Szałamacha, as well as changes in other ministries for the time being. However, speculations regarding this matter strongly impact the zloty. The Polish currency is becoming increasingly volatile and it will probably remain this way until the official decision is announced.

The presidential debate in the USA between Hillary Clinton and Donald Trump may also impact the zloty investors. Recently, the surveys were giving Trump similar chances for victory as they did for Clinton. In general, Trump’s victory in the debate and/or the elections is associated with a stronger dollar, as well as a larger risk aversion. Both of these factors are negative for the zloty, because a larger risk aversion causes capital to leave emerging market currencies, including the zloty. The zloty is currently gaining against the dollar and the USD/PLN went below 3.82.

Tomorrow’s events

The presidential debate between Hillary Clinton and Donald Trump will be held tomorrow at 3.00 AM. Despite that the survey medium, RealClearPolitics, (it contains surveys by Bloomberg, Quinnipiac, L.A. Times, Reuters, The Economist, ABC and NBC) indicates Clinton’s victory in the elections, the amount of votes in favor of Trump are increasing (the latest Bloomberg survey from today indicated a slight advantage for Trump). This direct debate may appear crucial for the final result of the elections.

This may be significant for the currency markets. Primarily, Trump said that he’d see different people as the Fed’s chair, instead of Janet Yellen. Moreover, he finds low interest rates unfair for those who save money. We need to mention that the president does not have the power to replace the Fed’s chair. However, in the case that Yellen (or any other Federal Reserve member) resigns, he is entitled to nominate Republican candidates who have a history of being more hawkish (Yellen’s term of office ends in January 2018). Trump’s victory in the debate would be positive for the dollar.

Another reason for which Trump’s victory in the debate could strengthen the dollar is the announced decrease in taxes for enterprises. It seems very unlikely that the Republicans would lose their power within the Senate. Therefore, the tax could be implied rather quickly. We also need to keep in mind that Donald Trump often changes his mind, as well as the fact that some of his ideas are more controversial than that of Clinton’s (for example, building a wall across the Mexican border or Islam believers being denied access to the USA). This means a large uncertainty for the markets. If he wins the debate, the markets may react with a larger risk aversion and investors would most likely relocate their capital to more secure assets, such as the yen or in gold, for example. The market considers these assets as a “safe coast” during increased risk aversion periods.

The International Energy Agency forum will be taking place in Algiers (between September 26th and 28th). One of its main events is the meeting between the OPEC and Russia’s representatives at an unofficial summit. At the end of last week, we have received the first speculations regarding a potential agreement about Iran freezing its production, as well as Saudi Arabia decreasing its mining. However, the agreement was not achieved and fluctuations in the oil market have clearly increased. There should be an increased volatility of oil prices, as well as speculations, coming from the summit alone. The main purpose of testimonies, news or “leaks” regarding particular countries which participate in the summit, is to improve the negotiation position, as well as to directly impact prices of oil.