Fundamental Forecast for the New Zealand Dollar: Neutral
- New Zealand Dollar Ends Last Week Stable on Weak Dairy Auction
- N.Z. Seven-Month Budget Surplus NZ$724m Larger Than Forecast
- For up-to-date and real-time analysis on the Kiwi and market reactions to economic factors currently ‘in the air,’ DailyFX on Demand can help.
The New Zealand Dollar has out-performed every currency aside from its rival Australian Dollar over the last week. Both the US Dollar and Japanese Yen fell by over 2.5% as a wave of risk sentiment took over markets across the world, which tends to lift higher-yielding currencies like EMFX and the New Zealand Dollar. The round of risk-on buying pushed the New Zealand Dollar to NZ$0.6817 on Friday that is under one penny shy of the October high of NZ$0.6896 ahead of next week’s RBNZ announcement. From a chartist's view, we did see NZD/USD ascend past the 55/200/100 DMA converging hurdles.
On Thursday morning, the Reserve Bank of New Zealand will announce their reference rate, which is expected to hold at 2.50%. The focus of this meeting will likely be on the guidance portion that will provide traders hints about what’s to come in the months ahead. Going into the meeting the New Zealand Dollar is riding a short-term wave of risk-optimism as the long-term inflation reading per the 2y inflation expectations continue to fall in New Zealand. In late February, the inflation reading reached the lowest level since 1994.
While this meeting doesn’t have a cut priced in, markets do appear prepared for information that would confirm a rate cut as the New Zealand Overnight Index Swaps are showing a higher than 50% probability of a cut to happen in the following meetings starting as soon as the April 28 meeting.
Traders will likely also compare Thursday’s statement with earlier shared words from RBNZ Governor Wheeler where he said, “Looking ahead, monetary policy will continue to be accommodative. With the ongoing weakness in commodity prices, and particularly oil, it will take longer for headline inflation to reach the target range. On the other hand, annual core CPI inflation, at 1.6 percent, is well within the target range, and the Bank’s combined measures of annual inflation expectations, averaging 2 percent, are more encouraging in terms of consistency with the PTA. However, we would not wish to see inflation expectations become unstable and decline significantly.” While the price of Oil has firmed over the last three weeks, the outlook is still fragile so that a turn lower would likely heighten the priced-in odds of a cut in future meetings.
Following the RBNZ announcement, Friday will provide traders with the BusinessNZ Manufacturing PMI report, which has recently read well above the 50 level at 57.9 in January. Last week, we saw New Zealand Trade Balance print a surplus of NZ$724M over forecast, which means that exports are picking up nicely. NZ 10yr Government Yields have declined from 3.617% in mid-December toward 2.901 this week. Given the data, it will be worth watching a move higher in yields that could signal a move of risk-on that may continue to lift up the NZD alongside an increasingly confident and stable RBNZ.
