Fundamental Forecast for NZD: Neutral
- The Reserve Bank of New Zealand will keep its official cash rate at 1.75% Thursday and maintain its neutral bias.
- The New Zealand Dollar needs a new catalyst after its recent rally ran out of steam.
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The New Zealand Dollar is in a rut and is unlikely to break out either upwards or downwards as the central bank’s official cash rate looks set to remain at 1.75% for months and perhaps years to come. The Reserve Bank of New Zealand meets on Thursday morning local time and a rate move would be a huge surprise.
Instead, RBNZ Governor Graeme Wheeler will likely emphasise not just that rates will not be changed for a long time yet but also that the bank’s bias is strictly neutral, with an equal chance of the next move being an increase or a decrease. That could be as far away as late next year.
Chart: NZD/USD Daily Timeframe (2017 to Date)
As the chart above shows, NZDUSD has been climbing since mid-May. However, that rally has run out of steam and for the past few sessions the pair has traded sideways. That’s despite news last week of lower-than-expected GDP growth of 0.5% quarter/quarter in Q1.
The data imply that GDP growth this year could be nearer 3.0% than 3.5%. However, core inflation in New Zealand remains subdued and headline inflation is only just above the midpoint of the RBNZ’s 1%-3% target range.
This all suggests a neutral bias for NZD, although IG Client Sentiment data suggest that NZDUSD could resume its uptrend once the current consolidation period ends.
Retail trader data show 20.2% of traders are net-long with the ratio of traders short to long at 3.96 to 1. In fact, traders have remained net-short since May 24, when NZDUSD traded near 0.69967; the price has moved 3.5% higher since then. The number of traders net-long was 1.5% higher on Friday than on Thursday and 14.1% lower from last week, while the number of traders net-short was 15.4% higher than Thursday and 34.1% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZDUSD prices may continue to rise. Traders were further net-short than Thursday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bullish contrarian trading bias.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at firstname.lastname@example.org
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