New Zealand Dollar Rallies after Chinese Officials Pledge Stimulus and Kudlow Talks of "Trade War" De-escalation

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- NZD rallies to two-week high on series of favourable developments. 

- China shows resilience, stimulus pledged, as Larry Kudlow opines.

- But some are skeptical, say improved market mood won't last. 

The New Zealand Dollar rose Thursday as traders responded to a duo of supportive developments in China overnight, and after a White House official hinted that a possible de-escalation of President Donald Trump's "trade war" against China could be in the pipeline. 

October's Caixin manufacturing PMI survey showed activity within the industrial sector of the world's second largest economy holding up better than many had expected during the recent month.

The PMI rose from 50.0 to 50.1 when markets had anticipated that it would decline to 49.9, which would have indicated that output within the sector is falling. 

This is important for the Kiwi because the Antipodean currency is underwritten by New Zealand's agricultural commodity trade with China, which means whenever the Asia Pacific economy gets hurt, so too does the Kiwi Dollar. 

China's economy has been creaking under the strain of tariffs imposed by President Donald Trump on around $250 billion of goods exported to the U.S. each year.

Trump has also threatened to impose tariffs on a further $267 billion of Chinese goods if the country does not change course on its "unfair" trading practices. However, comments from White House economic adviser Larry Kudlow overnight appeared to suggest Trump might be willing to soften his stance toward China in exchange for concessions.

"Risk proxies found further support after comments from Kudlow that Trump has not “set in stone” any decisions on escalating tariffs on Chinese goods and may withdraw some duties if there are promising policy discussions with China. Given he’s a perma China/trade dove who has time and again proven to be a reverse indicator on Trump’s actions, we’re not holding our breath," says Sue Trinh, head of Asia FX strategy at RBC Capital Markets. 

Thursday's price action also comes after Chinese officials said they will soon unveil another stimulus package designed to support the economy as it grapples with the adverse effect of Trump's tariffs. 

"FX markets are moving significantly today, with USD coming off its highs across major currencies," says Mark McCormick, North American head of FX strategy at TD Securities. "AUD, NZD, SEK are all up 1.1%+ as well, and USDCNH is down 0.4% on expansionary comments from officials."

China's National Council said Wednesday the economy is being damaged by "external forces" and is in need of stimulus to temper an ongoing slowdown. Official data showed Chinese growth falling from an annualised pace of 6.6% to 6.5% during the third-quarter. But some economists have said the true slowdown was even steeper. 

"The amount of the stimulus is missing in the announcements. We estimate it at CNY9 to 10 trillion. We also weaken our yuan forecasts for 2019," says Iris Pang, a China economist at ING Group, before forecasting the Chinese Renmimbi will shed a further 6% of its value over the coming year, taking the USD/CNY rate to 7.30 in 2019. 

The NZD/USD rate was quoted 1.36% higher at 0.6607 during early trading Thursday, after extending its recovery off multi-year lows reached around the middle of October, while the Pound-to-New-Zealand-Dollar rate was down 0.46% at 1.9495.

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

The flurry of supportive developments in the U.S. and China have buoyed the New Zealand Dollar, which has shed around 7% of its value against the U.S. Dollar in 2018, this week but analysts are skeptical of how much longer the improved mood within markets will last. 

Both RBC Capital Markets and ING Group are among the many who have said they expect the trade war to drag on into 2019 and ING's forecast of another 6% decline being in the pipeline for the Renmimbi once into 2019 is without doubt a negative omen for 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 and colleague of Pang at ING Group, in an earlier note to clients.

The New Zealand Dollar has ceded ground to almost all of the G10 basket in 2018 and not only because of events on the international stage either. The domestic economic environment has also become hostile toward the Kiwi currency.

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