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Will Wheeler Pose a Rate Cut Now or Wait Until November?

Fundamental Forecast for the New Zealand Dollar: Neutral

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When the RBNZ cut the overnight cash rate in August, few probably would’ve expected what would happen next. While making the cut, RBNZ Governor Graeme Wheeler even indicated that more cuts could be in the cards should oncoming data support it; so this reduction was even accompanied with a dovish backdrop from the head of the RBNZ. But in the days following that rate move, the Kiwi continued to rally higher, moving in the exact opposite direction of what the RBNZ was likely looking for when cutting rates.

This puts the RBNZ in a difficult spot, and could give the bank some additional motivation to kick rates lower again at their upcoming meeting; although this may be a bit presumptuous given that incoming data out of New Zealand hasn’t really been bad enough to warrant rate cuts at two consecutive meetings in two short months. At this point, markets are pricing in less than a 25% chance of a cut at next week’s meeting; and more likely, we’ll probably hear some talking down of the currency rate by Mr. Wheeler as he notes the potential for another cut at their next rate decision on November 9th.

Thickening the drama is the timing of this meeting, as it takes place less than 24 hours after a widely-awaited Bank of Japan rate decision and less than two hours after Chair Yellen of the Federal Reserve finishes the press conference for their interest rate decision. Each of these can have an impact on the RBNZ’s economic outlook given how critical trends in either of those currencies can impact trade and capital flows between these economies and New Zealand: So this is just more reason for the bank to wait to pose another move on rates until later in the year.

November becomes more likely for a potential rate cut as this is when the bank will also be releasing inflation expectations; and this also gives the bank more time to evaluate data in response to the most recent cut in August. The big driver for the Kiwi will likely be how dovish the bank appears considering that the Kiwi-Dollar is trading very near an annual high. So while the RBNZ will likely try to talk this down, it looks more probable that any actual rate cuts may be waiting until November the 9th.

Because of this, we’re going to hold a neutral forecast on the New Zealand Dollar for the week ahead, with a warning of caution around this upcoming RBNZ meeting as the bank will be making the announcement in what could be extremely volatile market conditions in the wake of FOMC.