New Zealand Dollar Recovers Poise but it's Swimming Against the Tide say Analysts

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- NZD bounces on Trump's optimism about China "deal".

- But the tide of capital flows is still against NZD, will win.  

- Talks at November's G20 a crunch moment for Kiwi Dollar.

The New Zealand Dollar rose Tuesday as traders welcomed President Donald Trump's expression of optimism that a deal to end his so called trade war with China can be reached in coming weeks or months. 

President Donald Trump told Laura Ingraham of Fox News Monday that he is confident of striking a "great deal" that ends the tariff conflict with China. 

His comments come just one month away from the G20 summit in Buenos Aires, where Trump and President Xi Jingping are expected to hold bilateral talks.

Although the White House previously played down the meeting's significance and Trump says the Chinese are "not ready" to do a deal yet, optimism was enough to boost the New Zealand Dollar Tuesday. 

The NZD/USD rate was quoted 0.29% higher at 0.6545 Tuesday, after having recovered from multi-year lows earlier in October, while the Pound-to-New-Zealand-Dollar rate was down 0.75% at 1.9462. 

Stock markets were also boosted by the comments during the overnight session, with China's Shanghai Composite Index closing 1.02% higher and Japan's Nikkei 225 rising 1.45%.

"USD was boosted by a recovery in global equities overnight but, but NZD was also in favour, which saw [the NZD/USD] cross tread water. Global developments continue to dictate moves," says Daniel Been, head of FX research at Australia & New Zealand Banking Group (ANZ). "Month-end portfolio rebalancing could add to Kiwi selling in coming days."

China is the largest buyer of New Zealand's agricultural exports so developments that impact sentiment toward the world's second largest economy, or Chinese financial assets, have a knock-on effect on the Kiwi. 

China's stock and currency markets have suffered severe losses in 2018 while the economy has also slowed as President Trump's tariffs on some $250 billion of the nation's annual exports to the U.S. begin to bite. 

Analysts are watching to see if the market rises above the key 7.0 level in the USD/CNY rate as this would trigger further losses for the Kiwi currency too. 

"The developments have raised the stakes ahead of the upcoming meeting between Trump and Xi Jinping, which could prove pivotal for foreign exchange market performance heading into year end. Without a breakthrough in talks, we would expect commodity related and Asian currencies to remain under selling pressure with USD/CNY already edging closer to key technical resistance at the 7.0000-level," says Lee Hardman, a currency analyst at MUFG.

Increasing headwinds for the Chinese economy and President Donald Trump's threats to target an additional $258 odd billion of its goods trade with fresh tariffs have seen speculators bet heavily against the Kiwi Dollar in 2018. So much so that the amount of money now stacked against the Kiwi is close to a record high.

This has been a significant, although not the only, driver behind the Kiwi's steep 2018 lossess. The NZD/USD rate has now declined 7.4% this year while the Pound-to-New-Zealand-Dollar rate has risen 2.4% despite Sterling having declined against most other G10 currencies. 

"Despite some improvement to the tenor of recent NZ data including retail sales, GDP and CPI, our NZ growth signal remains depressed and among the weaker of the G10," says Richard Franulovich, head of FX strategy at Westpac. "Yield spreads continue to trend against NZD and risk premia across global markets have surged lately as well, leaving the model content to stick with outsized NZD shorts for yet another week."

A deteriorating interest rate outlook, driven by persistently disappointting inflation and growth data, has been the other most significant driver of losses for the Kiwi Dollar.

New Zealand's inflation rate has been below the midpoint of the 1% to 3% target band for most of the time since 2012, neccesitating a "loose" monetary policy from the Reserve Bank of New Zealand (RBNZ).

"NZD will be driven in part this week by the October ANZ Business Outlook survey (Wed). A softer confidence survey is a downside risk to New Zealand economic activity. This can further weigh on New Zealand interest rate expectations and the NZD," warns Joseph Capurso, a currency strategist at Commonwealth Bank of Australia. 

The RBNZ has now kept its interest rate at a record low of 1.75% for almost two years while others like the U.S. Federal Reserve have raised their rates on multiple occassions during that period. 

The net effect of this policy divergence has been to push U.S. bond yields higher and New Zealand yields lower to such an extent that investors now earn better returns by holding American debt rather than Kiwi bonds. 

This is a reversal of the situation that existed for some years up until 2018 and has turned the tide of international capital flows decisively against the New Zealand Dollar. 

"With NZD/USD having broken the 0.65 level, and very few positive catalysts on the horizon, there’s a risk that we could see a decline to 0.61-0.62 (2015 lows) on the back of rising US Treasury yields in the coming months. For now, we think NZD/USD will spend most of its time below 0.65 in 4Q18 - with investors retaining a sell on rallies bias," says Viraj Patel, an FX strategist at ING Group.

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