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The Week Ahead in FX Markets – NZ GDP and US Rate Decision to set tone for NZD

Published March 18, 2019

By Phil Lynch

The well-trodden range of 0.67-0.69 for the New Zealand dollar continues this week, with the NZDUSD opening at 0.6840. This Thursday, in particular, brings two major events for the New Zealand dollar:

  • US Federal Reserve Rate Decision – with the US Fed Funds Target Rate set to remain on hold at 2.25-2.50%
  • New Zealand GDP data – with the year on year economic growth rate expected to fall to 2.5%

US Federal Reserve Rate Decision

This Wednesday & Thursday (NZ time) the US Federal Open Market Committee (FOMC) will meet to determine their interest rate outlook. The course for the FOMC has been well telegraphed over the past few months, and markets are pricing in a 99% chance that rates will be kept on hold at 2.25-2.50%.

This is a significant event for the kiwi, which continues to take its cues from offshore events. The US central bank has made a dramatic shift away from its hawkish stance in 2018, but not everyone is convinced that this is the right path.

New Zealand Growth Rate – What’s Expected?

New Zealand’s growth rate is published this week, and markets are expecting the Q4 growth rate to slow to 2.5% from 2.6% in Q3. The downtrend in GDP has continued since Q4 2014 and has caused some concern for the Government and Central Bank alike.

On a quarterly basis, growth is expected to come in at 0.6%. This is significantly lower than the RBNZ’s forecast growth rate of 0.8%, which was finalised as their forecast just 39 days ago. This downturn in GDP is raising questions of the RBNZ, particularly about how long their neutral outlook on the OCR can last. We know that Governor Orr takes a very long-term approach – but his hand may be forced to turn more dovish. The result is that markets are now close to fully pricing in a rate cut from the RBNZ by November this year.

The NZDAUD – the dizzying heights continue

The NZDAUD remains elevated, and questions remain on how long this can last. With the NZD trading in a relatively tight range, analysts are focusing on the value of the AUD.

This is best measured by the AUDUSD which has stubbornly held on to the 0.70 cent level. Of the last 24 trading weeks, 16 have seen the AUDUSD trade into the 0.70’s at some stage across the week. Yet there has only been one day where the AUDUSD dipped below 0.7000 – indicating a huge amount of AUD buyers exist at this level. This is fuelling the expectation that the AUD is undervalued. A rise in the value of the AUD will see the NZDAUD return to more normal levels around the 0.92-0.93 mark. But those “normal” levels are continuing to rise as the trend remains elevated.

It will be a double whammy on Thursday for the NZDAUD, with NZ’s GDP number coming through at 10:45 AM, and the Australian Unemployment Rate being published at 2:30 PM.