By Phil Lynch
The New Zealand dollar opens this morning at 6-week lows, once again suffering at the hands of global economic and political developments. This week, it will be local factors that drive the direction of the New Zealand dollar with most attention awarded to Wednesday’s RBNZ OCR Decision. First up – a quick review of key events from last week.
The Fed cut rates by 0.25%, joining the chorus of central banks around the world who are doing so to stimulate their economies. The rate cut itself was fully priced in, but markets did not know which way the Fed would lean for future rate cuts. As it turns out, they somewhat disappointed markets by calling the rate cut a “midcycle adjustment” rather than the start of a new rate cutting cycle. Rates were cut to hedge against “downside risks”.
The downside risks that Powell warned about, have a lot to do with the trade war between the US & China. The trade war was stepped up a notch early on Friday morning, when President Trump announced tariffs of 10% on China’s remaining $300 billion of exports to the United States.
Both events were particularly negative for the NZD/USD. We can now expect US interest rates to be higher than previously expected (as the Fed are not planning to aggressively cut rates as many suggested). This will fuel demand for the US dollar as their interest rates remain significantly higher than New Zealand interest rates.
Secondly, the kiwi (and other commodity currencies), perform particularly poorly in times of economic turmoil – which is a side effect of a populist US president who makes major policy announcements on Twitter, against the recommendations of his closest advisers.
The messaging from the Fed also highlighted the importance of US economic data. The first piece was US Non-farm Payrolls, which came in as expected with 164k new jobs, an Unemployment Rate of 3.7%, and Average Earnings beating expectations with a 3.2% annual growth rate. These are all signs that the US economy is doing well and thus undermines the chance of future rate cuts. This was enough to kick the kiwi that little bit lower late in the week.
The first major event this week will be our Unemployment Rate which is published on Tuesday morning at 10:45 AM. The rate is expected to climb to 4.3%, with some notable banks like ANZ expecting an even higher jump to 4.4%. With the state of Business Confidence (44.3% of survey respondents expecting conditions to deteriorate), it would be foolish to expect the Unemployment Rate to improve. However, a 4.4% Unemployment Rate is near enough to the RBNZ’s goal of ‘maximum sustainable employment’.
The RBA has cut rates already this year and is now expected to cut rates again to 1.00%. A cut to 1.00% will boost the likelihood of a cut from the RBNZ, given so much our economic performance is dependent on our closest neighbour. This rate cut is close to fully priced in, so the focus will be on what the RBA plans to do in the future – will they indicate another cut to 0.75% is likely?
On Wednesday afternoon at 2:00 PM the RBNZ will announce their decision on the OCR, and this is main event of the week. Markets have now fully priced in a rate cut of 0.25%, which would take our rate to just 1.25%. This cut is considered a done deal.
Many economists are also expecting the RBNZ to signal additional cuts are necessary to protect against “downside risks”, with some expecting the RBNZ to cut to as low as 0.75% over coming months. The consensus is that the RBNZ will cut rates again in November. But I don’t think they will.
Since the last OCR rate cut and MPS, we have seen some reasonably notable releases, including:
With the RBNZ entering new territory with a record low OCR, I feel the time is right for them to signal a long pause in their cycle of rate cuts. For this reason, I believe the New Zealand dollar will be well supported this week and will find plenty of buyers at the 0.65 cent level.
© Copyright - EncoreFX, 2018.The information in this post is provided for general information purposes only and has been prepared without taking into account any person’s objectives, financial situation or needs and, accordingly, it does not constitute personalised financial advice under the Financial Advisers Act 2008, nor does it constitute advice of a legal, tax, accounting or other nature to any person. Before acquiring any financial services or products from EncoreFX, you should consider the appropriateness of the information having regard to your own objectives, financial situation or needs. We recommend that investors seek advice from their usual adviser before taking any action. EncoreFX (NZ) Ltd is a registered Financial Services Provider (FSP 461386), and is a licensed derivatives issuer under the Financial Markets Conduct Act 2013. EncoreFX (NZ) Ltd has lodged a Product Disclosure Statement (PDS) for each of our derivatives with the Registrar on 21-Dec-2016. A copy of each PDS is available from us or from the Registrar at www.business.govt.nz/disclose.