What Is Driving NZ Currency And Equity Markets Amid US-China Trade Tension?

Thursday, 28 May 2020, 3:48 pm
Article: Kalkine

New Zealand’s performance in containing the coronavirus pandemic has been monumental in building  optimism around equity and currency markets. Undeniably, investors seem to be driven by bullish market sentiments backed by an early economic reboot in the nation, and cushioning of the domestic currency.

Notably, NZD/USD surged 1.57 percent on 27 May 2020 to close at 0.6197 USD. The pair has gained around 2.7 percent in the last  month, reflecting the international scenario in which a diverse array of developments steered the market movement.

Although the US-China virus spat seems to be aggravating looming fears of a trade war between the two most powerful economies, the New Zealand stock market continues to rally and reaffirm a progressive economic scenario under the eased lockdown measures at Level-2 Alert.

Jacinda Ardern’s government strategic initiatives towards a virus ‘elimination’ goal are evident in the decent infection statistics and flattened Covid-19 curve.

Notably, in the population of over 5 million, New Zealand witnessed only 1504 Covid-19 cases with a total of 21 deaths, according to the NZ Ministry of Health.

Meanwhile, the focus on economic revival anchored the fiscal and monetary initiatives in the country. The government’s stimulus package, including the wage subsidy scheme, cushioned the impact of Covid-19 crisis on the economic stability.  NZ central bank slashed the official cash rate to 0.25% and committed $60 billion towards quantitative easing for boosting economic revival.

The Reserve Bank of New Zealand Governor, Adrian Orr indicated that the robust financial system of the banks allows them ‘to lend and prosper’ amidst tough economic conditions.

Given the optimistic market sentiments, let’s deep dive into core factors that are presently driving the NZ currency and equity markets.

Trade Surplus for April

NZ trade scenario witnessed a positive nudge in April with $1.3 billion trade surplus and $5.3 billion exports while the nation was operating primarily under Level 4 lockdown. Dairy products, including infant formula and Kiwifruit, mainly drove the rise in the total value of exports during April 2020.

The imports of petroleum, vehicles and machinery fell significantly, dragging down the monthly import values by 22% to $4 billion compared to April 2019. The decline reflects a sharp weakening in the travel and tourism demand in Level 4 lockdown amidst the closure of non-essential businesses. At the same time, the imports for masks and laptops picked up amidst the growing safety concerns and work from home trends.

Potential for Vaccine

Many potential vaccines for Covid-19 are in the pipeline for further experimental tests, which is giving positive signals to investors on the mounting health crisis. The equity markets, along with the high-returning New Zealand Dollar, have been demonstrating green shoots amidst the worldwide progress in potential vaccine discovery.

Clinical stage biotechnology company Moderna declared the completion of the first phase of clinical trial, which demonstrated encouraging results for the RNA vaccine. Meanwhile, another company Novavax has commenced its Phase 1 clinical trials. The addition of Merck & Co. in the race for vaccine and drug discovery has raised further hopes for a potential Covid-19 cure in the near future.

Cash Supply in NZ Market

Quantitative Easing along with the wage subsidy scheme remained at the forefront to the economy reboot master plan in order to enhance the monetary flow in the country. RBNZ committed another $27 billion to its Large-Scale Asset Management Program which now values $60 billion. The Central Bank has been also involved in the purchase of NZ Government Inflation-Indexed Bonds along with the previous New Zealand Government Bonds and Local Government Funding Agency Bonds.

Further, the RBNZ Governor Adrian Orr urges banks to take a  ‘forgiving’ stance towards mortgage owners.

NZ Interest Rate Scenario

The RBNZ’s Monetary Policy Committee “reaffirmed its forward guidance” to maintain the official cash rate at 0.25% for another 12 months. The committee indicated that further cuts in the OCR would not be useful in reducing the borrowing rate for Kiwis.

Further undermining the possibility of the negative interest rate in the near-term, Adrian Orr  indicated that the central bank is in no rush for ushering negative interest rates. However he  hinted at the possibility of a drop in the retail interest rate.

Meanwhile, the removal of LVR restrictions on new mortgage lending has been supporting the existing policy, centered at facilitating borrowings for the New Zealanders.

US-China Tension

Investors all around the world are eyeing the growing tension between the world’s powerhouses that could potentially impact global businesses as well as the international trade scenario. Tension re-erupted after Beijing proposed to clamp down on Hong Kong which would bring an end to the era of ‘one country, two-nation.’

United States President Donald Trump has stated that if China goes ahead with its proposal, there will be a ‘very strong’ response coming from the US.

This has fueled up the long-standing virus blame game with the series of allegations between the US and China that have worsened bilateral relations.

Market Sneak Peak

S&P/NZX 50 Index priced in boosted investors’ confidence, posting 13.95% return on the QTD basis as on 27 May 2020.

Talking about gainers, stock price of large fishing company Sanford Limited (NZX: SAN) rose by around 2.36% on the MTD basis to close at $7.380 on 27 May 2020, while supply chain company Mainfreight Limited (NZX: MFT) gave ~11% return in the day’s trading session on Wednesday before closing at $39.99.

Moreover, the banking stocks reported significant gains, with the Australia and New Zealand Banking Group Limited (NZX: ANZ) up by ~12% intraday to close at $19.59, while Westpac Banking Corporation (NZX: WBC) surged by ~11% intraday to last trade at $19.19 on 27 May 2020.

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