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New Zealand Dollar Outlook Hinges On RBNZ Policy

New Zealand Dollar Outlook Hinges On RBNZ Policy

David Song, Strategist
New_Zealand_Dollar_Outlook_Hinges_On_RBNZ_Policy_body_Picture_5.png, New Zealand Dollar Outlook Hinges On RBNZ Policy

Fundamental Forecast for New Zealand Dollar: Neutral

The New Zealand dollar pared the advance from earlier this week to maintain the range-bound price action carried over from June and the high-yielding currency may continue to track sideways in the days ahead as the Reserve Bank of New Zealand preserves its wait-and-see approach. Indeed, the RBNZ is widely expected to keep the benchmark interest rate at 2.50% in July, but we will be closely watching the statement accompanying the rate decision as market participants weigh the prospects for future policy.

According to Credit Suisse overnight index swaps, investors are currently pricing a 5% chance for a 25bp rate cut next week, while borrowing costs are expected to hold relatively steady over the next 12-months as the central bank anticipates to see a faster recovery later this year. As the RBNZ sees the region to benefit from the rebuilding efforts in Christchurch, we should see Governor Alan Bollard strike an upbeat outlook for the region, but the slowdown in the global economy may bring about some dovish comments as headline reading for inflation expands at the slowest pace since 1999. At the same time, we’re expecting to see New Zealand’s trade surplus narrow to 2M in June from 301M the month prior, and the weakening outlook for global trade may spark speculation for lower borrowing costs as the RBNZ maintains a cautious tone for the region.

In turn, we may see the NZDUSD come under increased pressure next week, and the pair may threaten the range from the previous month should the RBNZ show a greater willingness to lower the benchmark interest rate further. However, if Governor Bollard continues to endorse a neutral stance for the medium-term, we may see the kiwi-dollar make a run at the monthly high (0.8075), and the high-yielding currency may outperform against its major counterparts as the central bank moves away from its easing cycle. - DS

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