Global markets were sharply lower overnight as investors fretted over escalating tensions between the United States and North Korea. North Korea said it was completing plans to fire four intermediate-range missiles over Japan to land near the U.S. Pacific island territory of Guam in an unusually detailed threat, following on from Trump’s strong words earlier in the week.
The news flow has halted a remarkable period of calm for the US market in particular, and as geopolitical risks have risen demand has risen for safe haven assets such as gold and the Japanese Yen.
As recently as the earlier this week, we reiterated that we believe both the Australian and NZ dollar are overvalued (particularly versus the US dollar). The recent geopolitical developments, as well as the Reserve Bank of New Zealand decision yesterday (which we discuss below) look to be weighing on the NZ dollar as illustrated below.
NZD/USD Exchange Rate
RBNZ on Hold, Talks Down Currency
The Reserve Bank of NZ left the official cash rate at 1.75% yesterday, and said is it likely to stay there for "a considerable period", which is consistent with our forecast of no change in the near future (The RBNZ continues to forecast a rate hike in the 3rd quarter of 2019).
Interestingly, Governor Wheeler pushed back against NZD strength in the post-meeting press conference. The change in language regarding the NZD (it “needed” to be lower as opposed to “would help” previously) is a signal to the markets that further excessive currency appreciation will not be tolerated by the RBNZ.
The fall in the NZ dollar is welcome relief for us, given one of ’s key investment medium term investment themes is for a weaker NZ dollar & Australian dollar. Among companies which benefit from a weaker currency are offshore earners, exporters and stocks in currency sensitive sectors such as Tourism.
Australia & New Zealand Market Movers
The Australian share market was little changed yesterday (ASX 200 index -0.08%) as softening in US futures as tensions between North Korea and the United States hit investor confidence. Among the company’s reporting profits yesterday were Virgin Australia, which says its core domestic business is on the mend despite weaker demand leading to an underlying annual loss of $3.7 million.
The New Zealand market was slightly lower on Thursday (NZX 50 index -0.13%) with New Zealand Oil & Gas gaining on a partial takeover offer while CBL Corp and Goodman Property Trust fell. In other news, Vital Healthcare Property Trust, the listed hospital owner and developer, increased annual earnings 54 percent as it saw rental income grow in a year when it made seven major acquisitions, with its outlook strong for 2018.
3 Things Markets Will be Watching this Week
1. It’s all about corporate profits as Earnings season continues across the US and Australia.
2. Local earnings season kicks off in New Zealand.
3. The Reserve Bank of New Zealand releases an interest rate decision Thursday, with it being Governor Graeme Wheeler's last monetary statement.
Have a Great Day,
Team