By Phil Lynch
The New Zealand dollar opens near 2.5-month highs against the greenback and is now trading just below 0.6440. The level of 0.6440 is significant, as it represents the level the NZD closed at following the RBNZ’s shock decision to lower interest rates by 50 basis points in August. The last 2.5-months have been tough going for the New Zealand dollar, as markets have been grappling with the possibility of even lower interest rates in New Zealand.
Lower interest rates mean less demand for the NZD, and most analysts were betting on the RBNZ lowering rates to 0.75% when they next meet on 13 November, and then further to 0.50% in 2020. That expectation has now changed – and this change has allowed the NZD to recover from the record lows over the past few months.
Today, markets are pricing in just a 52.7% chance of a rate cut on 13 November. Some notable players, including Westpac, have changed their stance, with their new view being that the RBNZ will not cut rates again in 2019.
Whilst there is a consensus that the RBNZ will need to cut rates again at some point over the next 12-months, the general sentiment has shifted, and much of this change is centred around the global economic outlook. There is now more positivity, given the stronger likelihood of a US-China trade deal, the lower likelihood of a no-deal Brexit, and the rhetoric coming from other central banks.
One of the challenges for our own central bank, is managing our two-stroke inflation. Domestic inflation remains elevated, but imported inflation remains subdued. Yet as recently as last week, the U.S. Federal Reserve indicated an end to their rate cutting cycle, and this less dovish approach is indicating that things abroad aren’t so bad. Markets now expect the RBNZ will either:
Both scenarios are seen as significantly more NZD positive than what markets were looking at just a month ago, and that is why we open today at 2.5 month highs.
Excitement in markets is already building for next weeks RBNZ OCR decision. This week will however provide two key indicators which will help formulate expectations for that OCR decision.
The first major event will be the RBA Cash Rate Decision, released Tuesday afternoon at 4:30 PM NZ time. The RBA have already cut rates three times in 2019, and their Cash Rate is now sitting at 0.75%.
Markets had been pricing in a greater than 50% chance of a cut, but those chances have slipped to just 6% now. The RBA’s sentiment tomorrow will influence the expectations for the RBNZ’s decision next week. A more neutral RBA will lead markets to believe the RBNZ will be more neutral too.
On Wednesday at 10:45 AM, our own Unemployment Rate will be published, and analysts are expecting a moderate rise to 4.1% from 3.9% currently. It would take a significant miss to the upside, for this data to worry the RBNZ. At 4.1% the Unemployment Rate is still close to record lows. This will be another indicator that should continue to support the case for the RBNZ to keep rates on hold next week.
Other key announcements this week include several Chinese & U.S. economic data releases. This data will give us a clearer picture of the economic impact of the trade wars.
Another major release is the rate decision from the Bank of England. It’s unlikely the Bank of England will offer too many surprises, given the upcoming election, so we can expect them to keep rates on hold at 0.75%.
This week we look at the falling level of Unemployment in New Zealand. The chart below shows the Unemployment Rate (blue line, right hand axis). Over the past 10-years since the GFC, the Unemployment Rate has fallen considerably, and is now at a level deemed appropriate by the RBNZ.
The chart below also shows the Labour Cost Index (gold line, left hand axis). This shows wage prices are rising, currently at the rate of 2.3% per annum. Whilst this is another cost for business, it is generally a good sign for the wider economy.
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