New Zealand Needs a Relief Rally to Take Eyes Off RBNZ Rate Cut BetsNew Zealand Needs a Relief Rally to Take Eyes Off RBNZ Rate Cut Bets

Fundamental Forecast for the Kiwi:Bearish

Risk markets are no longer staring at the abyss as they were at the beginning of last week, which is benefitting markets like equities, Oil, & the New Zealand Dollar. From the start of the year, the New Zealand Dollar has been on its back foot as traders were quick to look at the slack of high-interest rates that the RBNZ could cutto get the economy running smoothly again. The apex of this ‘sell the kiwi against anything,’ move was after the disappointing CPI print on the 19th.

Inflation dropped to 0.1% YoY in the last quarter of 2015, showing the lowest print since 1999. Oil’s precipitous fall has hurt global inflation readings everywhere, and the RBNZ referenced China in their December meeting where they noted a further slowdown would, “warrant a mix of a lower New Zealand Dollar exchange rate and more-stimulatory monetary policy.” Most economists surveyed by Bloomberg do not expect a cut now, but rather in the spring if the global economy shows deterioration.

Since that statement, the growth in China has been tepid, and the maturation that goes from being a manufacturing economy to becoming a consumer economy has been awkward for the world’s second largest economy. Recent readings after the RBNZ’s statement showed growth in China did fall to 6.8% YoY in the last quarter of 2015, which was the lowest growth rate in 25-years, and well below the 7.2% & 7.6% growth rate in 2014 & 2013 respectively. These data points and the potential for others like it could keep New Zealand’s CPI below long-term averages giving the RBNZ further scope to cut next Wednesday.

After the RBNZ decision next week, we’ll see New Zealand Merchandise Trade Balance, which is expected to tick up from -779m to -131m due to a seasonality boost. Last month's print showed the widest annual trade deficit in 6.5 years.