With the RBNZ OCR decision looming (10th Aug 22:00 GMT), it’s worth noting the dichotomy between NZD rates and FX. It seems that rate markets have fully priced impending OCR cuts, however NZD/USD continues to trade more robustly So what’s been driving the Kiwi higher?
Firstly, risk assets have been trading strongly, with the SPX up 6.7% YTD and 19% from its February lows. Of course, the Fed seemingly on hold for much of the year has spurred on risk appetite and created a grab for yield dynamic in global fixed income.
Secondly, whilst dairy prices haven’t exactly been ripping higher, the oil sell-off in July has acted as a tailwind to New Zealand’s terms of trade.
Finally, there is a growth dynamic also priced into NZD. Domestic economic momentum in New Zealand remains solid and above most other advanced economies. Citi economists expect 2.7% growth for FY2016. Therefore any cut delivered is despite reasonable growth and not because of weak growth. We doubt the RBNZ will ‘over-deliver’ and cut the OCR by 50bp, simply because the economy doesn’t warrant it.
Therefore, the focus will be on forward guidance, a clear signal that more easing to come is required. Anything less would be viewed as a disappointment for the market that may drive NZD up.
On balance, in this current RBNZ easing cycle it’s only the first cut that has had any significant influence on the currency, due to the surprise effect. More recently, we have seen divergent reactions to various central bank decisions. Both the BoJ and the RBA delivered additional easing recently, but saw their currencies appreciate. Whilst the BoE over-delivered, the economic circumstances cannot be compared to New Zealand.
With regards to a trade, we would prefer to wait for the statement on monetary policy by Governor Wheeler, however our bias would be to buy the potential dip in NZD/USD, preferably around the 0.68 level, which coincides with a 200 day moving average.