FX comment – RBNZ expected to cut OCR by 25bp to 3% on 23 July; NZD testing 0.68.

by: Roy Teo


  • RBNZ expected to cut OCR by 25bp to 3% on 23 July
  • NZD to decline to 0.65 by the end of 2015

 

RBNZ expected to cut OCR by 25bp to 3% on 23 July

Business confidence in New Zealand in June slide to the lowest level since March 2011 (Christchurch earthquake) as sentiment on the agricultural sector remains bearish. Businesses’ activity outlook also declined to the lowest level since June 2012. We now expect the Reserve Bank of New Zealand (RBNZ) to lower the Official Cash Rate (OCR) by 25bp to 3.0% in the next monetary policy meeting on 23 July. This is almost priced in by financial markets (OIS market implying more than 80% probability of 25bp rate cut). Since the RBNZ cut the OCR by 25bp on 11 June, economic data has disappointed. Economic growth in the first quarter was weaker than the central bank’s forecast. In addition, consumer confidence in June also extended its slide for the third consecutive month. We expect the RBNZ to lower the OCR to 2.75% by the end of this year. This is mostly priced in by financial markets.

 

NZD to decline to 0.65 by the end of 2015

The New Zealand dollar (NZD) came under some pressure to below 0.6810 after this morning disappointing business confidence data. Technical chart indicators imply that the currency is in oversold territory. Speculative short futures positions in the NZD are also at record high. Hence a short term relief rally could follow especially if the RBNZ is less dovish on 23 July. Looking ahead, we maintain our year end NZD/USD forecast of 0.65 even though financial markets have priced in our view of a lower OCR of 2.75% by the end of this year. This is because the NZD remains overvalued. In addition, the RBNZ has reiterated that a weaker NZD is needed given the decline in key commodity export prices. Furthermore, foreign investors’ holdings in local government bonds remains high at 69% in May. A sell off in NZD could result as capital flows reverse as the US Federal Reserve is expected to tighten monetary policy later this year. Last but not least, financial markets are underestimating the magnitude of rate hikes in the US in our view. This will provide further strength to the US dollar.