NZD declines as weak wage gains reignite rate cut speculation
The New Zealand dollar (NZD) was sold off aggressively from 0.7560 to 0.7480 after a weaker than expected employment print in the first quarter. The unemployment rate at 5.8% was higher than market expectations and the Reserve Bank of New Zealand’s (RBNZ) forecast of 5.5%. This has raised market speculation that the RBNZ is more likely to cut interest rates later this year. We attribute the rise in unemployment rate due to an increase in participation rate which rose to a record high of 69.6%. Overall the job market remains healthy in our view with the economy adding jobs at above trend rate. We think that the slow wage gains at 0.3%qoq could be due to lower commodity export income and lingering effects of drought. We remain cautiously optimistic that the RBNZ will keep the OCR unchanged at 3.5% well into 2016 as recent developments on inflation and the exchange rate is not materially different from the central bank’s forecast in March. In the short term, we expect the NZD to remain supported above 0.7400 ahead of US non-farm payrolls this Friday. Looking ahead, we expect a weaker NZD towards 0.68 by the end of this year.