NZD MPS Outlook

From the FXWW Chatroom – The RBNZ’s Monetary Policy Statement this morning cut the OCR by 25bp to 2.75% as was widely expected. It also signalled the OCR could eventually fall to 2.5%, which many had expected. 
This guidance was made via the press release as well as the 90 day interest rate forecast. The crucial policy paragraph read: “A reduction in the OCR is warranted by the softening in the economy and the need to keep future average CPI inflation near the 2 percent target midpoint. At this stage, some further easing in the OCR seems likely. This will depend on the emerging flow of economic data.” 
The 90-day interest rate forecast reinforced that. It was lowered by around 50bp from 3.1% to 2.6%, which is consistent with a 2.5% OCR. 
The previous warning about the high NZD exchange rate was repeated, albeit toned down given the large fall since June: “While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices.” 
This compares to July’s: “The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.” 
Swap market reactions to the MPS were as expected, given a terminal OCR of 2.5% was almost fully priced in, although the NZD had a sharper fall (possibly because it had a decent rally earlier this week). NZD/USD fell from 0.6400 to 0.6296. We wouldn’t expect it to fall too much below 0.6300 during the day ahead.  AUD/NZD rose from 1.0965 to 1.1100, with 1.1130 likely to prove sticky. 
2yr swap rates fell from 2.84% to 2.81%. The 10yr fell from 3.66% to 3.63%, leaving the 2-10yr curve unchanged at 82bp. We expect the 2yr to be around 2.80% during the day ahead. 

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