New Zealand Dollar Set to Struggle in September

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The New Zealand Dollar could struggle this September amidst a fall in global equity prices and a stock market correction.

The Pound to New Zealand Dollar exchange rate (GBP/NZD) rose half a per cent to 2.1197 on Tuesday after stocks slumped on a host of disappointing data from the U.S. that hinted at an ugly combination of slowing growth and rising inflation.

The Nasdaq 100 was down more than 3% and the S&P500 down more than 2% in what amounts to the biggest drop in almost a month. Nvidia's share price fell more than 10% on news of the issuing of a subpoena from the Justice Department as an antitrust investigation intensified.

Current market correlations suggest NZD could be set to register further declines if equity markets decline further over the coming days, as it is one currency that is highly sensitive to global investor sentiment.

"The performances of G10 currencies yesterday was similar to the more normal type response to risk aversion that we were used to," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank. "The higher beta G10 currencies suffered most with AUD, NOK and NZD the three worst performing G10 currencies."

Halpenny says global growth fears are intensifying and he thinks the recent price action seen in FX markets can continue "at least" until the Federal Reserve's mid-month meeting.

September is also an historically poor month for equity market returns, and September 2024 is already reinforcing this trend. "Perhaps investors turned cautious just on the knowledge that September is the only calendar month to average a negative return over the past 98 years. In other words, it may have been a self-fulfilling prophecy," says Charalampos Pissouros, Senior Investment Analyst at XM.com.

"The September curse strikes again," says Kathleen Brooks, research director at XTB. She explains:

"A mixture of fears about global growth, a commodity market sell off, shifting monetary policy cycles and seasonality, with stock markets typically doing badly in September, has been given a helping hand by the Department of Justice in the US, who has subpoenaed Nvidia as it seeks evidence that the AI giant broke anti-trust laws."

Developments in AI will prove decisive given Nvidia has been the mainstay of the U.S. market's rally in 2024. Questions will be asked about the prospects for risk sentiment if the Nvidia is unable to refind its winning ways.

We note there is nothing in recent data that fundamentally changes the U.S. economic trajectory and, with the Federal Reserve set to cut interest rates in September, there is the chance 'dip buyers' step back into the market.

Société Générale analyst Manish Kabra thinks strong profits for S&P 500 companies keeps stocks in buy-the-dip territory, but rotation from the narrow 'bubble' trade centred on AI and into the broader 'breadth' trade should continue.

So, although signs for the NZ Dollar in September are pointed lower, there is the prospect of a repeat of August's price action. In August, we saw a similar sharp selloff that ultimately turned around and led to a recovery by month-end.