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Whilst RBNZ are expected to cut rates again tomorrow, it remains unclear how dovish the statement may be, given the mixture of weak economic data of late alongside a lower currency and improved US-China trade sentiment.
According to a Reuters, 80% economists polled expect RBNZ to cut rates by 25 bps tomorrow. This would place their rates at 0.75% and on par with RBA, who are also at record low rates. Money markets are also pricing in a cut, with the 1-month OIS suggesting a 72.2% chance of a cut.
With a 25-bps cut so widely expected, we’d likely need a dovish cut to sustain further downside on the Kiwi. Domestic data could warrant a cut given its underperformed relative to expectations over recent weeks (according to the CESI index). Most notably, unemployment unexpectedly rose, business sentiment remains weak and inflation expectations fell to their lowest level since Q4 2016 today.
Given their ability to move fast and exceed market consensus, the potential for negative rates and / or QE further down the road, then we should be on guard for some form of a surprise tomorrow given their ability to do so in the past. There’s certainly no harm in being over prepared!
That said, there’s also a case to be made that an aggressively dovish cut may now be less likely.
- Trade relations between US and China have continued to thaw with the potential for a phase 1 trade deal on the horizon later this year. Given trade concerns are a key concern to New Zealand’s economy, it may be harder to justify an aggressive stance tomorrow
- TWI (Trade weighted index) has fallen -3.9% to 70.1c since their monetary policy report in August, where they stated “The New Zealand dollar TWI is assumed to remain around 73 over the projection period”. Adrian Ore has described a falling NZD as “well behaved” in the past and we suspect he’ll be pleased with its performance since August.
NZD/USD: The USD has seen a strong rebound from support, although yesterday’s bearish inside day on DXY suggests momentum could be waning. In turn, this has allowed NZD/USD to produce a 2-bar reversal above 0.6320 which leaves potential for a move higher over the near-term.
The degree to how high it can bounce is likely down to RBNZ tomorrow.
- If RBNZ hold rates it could catch many off guard and is likely the most bullish scenario for NZD pairs.
- If they cut (as expected) yet refrain from being overly dovish, then it could print a minor rebound.
- A dovish cut could see it break below 0.6320.
NZD/CAD: The commodity FX cross also shows potential for a rebound, yet it remains within an established bearish channel and of course Canada’s interest rates are at a premium over New Zealand’s, meaning any upside move it likely to face headwinds due to the differentials.
- Whilst 0.350 holds as support, the bias is for a rebound towards the upper trendline form the bearish channel.
- A break beneath 0.8350 suggests the bearish trend is set to resume and head for the lows.
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