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NZD/USD Outlook Hinges on Fate of RBNZ Easing Cycle

NZD/USD Outlook Hinges on Fate of RBNZ Easing Cycle

David Song,

Fundamental Forecast for the Kiwi: Bearish

NZD/USD may continue to retrace the decline from the October high (0.6896) as subdued wage growth in the world’s largest economy drags on the Fed outlook, but the outcome of the Reserve Bank of New Zealand’s (RBNZ) December 10 policy meeting may drag on the exchange rate should Governor Graeme Wheeler and Co. show a greater willingness to further embark on its easing cycle in 2016.

Even though the 211K expansion in U.S. Non-Farm Payrolls (NFP) fuels bets for a 2015 liftoff, the slowdown in Average Hourly Earnings may push the Federal Open Market Committee (FOMC) to implement a ‘dovish rate-hike’ at the December 16 interest rate decision amid the disinflationary environment across the major industrialized economy. Chair Janet Yellen may largely focus on taming interest rate expectations after raising the benchmark rate for the first time in nearly a decade as lower energy prices accompanied by dollar strength undermines the central bank’s scope to achieve the 2% target for inflation. At the same time, the Fed may offer little details on the normalization cycle as it remains ‘data dependent,’ and the fresh batch of central bank rhetoric may dampen the appeal of the greenback should the committee largely endorse a wait-and-see approach for 2016. In turn, the U.S. dollar stands at risk of facing choppy price action ahead of key rate decision as market participants weigh the outlook for Fed policy.

Meanwhile, according to a Bloomberg News survey, only 3 of the 18 economists polled forecasts Governor Wheeler and Co. to keep the benchmark interest rate on hold at 2.75%, and the near-term advance in NZD/USD may largely unravel in the days ahead should the central bank look to implement additional monetary support in 2016. However, the market reaction to a RBNZ rate-cut may not be clear cut should the board highlight an imminent end to its easing cycle. As the monetary support from earlier this year continues to work its way through the real economy, an insurance move to further insulate the economy may foreshadow a material shift in the policy outlook, and the New Zealand dollar may mount a larger recovery going into the end of the year should the central bank promote a wait-and-see approach for 2016.

Nevertheless, the long-term outlook for NZD/USD remains tilted to the downside amid the deviating paths for monetary policy, and more of the same from Governor Wheeler may drag on the exchange rate as the central bank keeps the door open to implement lower borrowing-costs. However, the kiwi-dollar stands at risk for a larger correction and may continue to recoup the losses from earlier this year should the RBNZ change its tune for future policy.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.