FX comment – Fade the current NZD strength

by: Roy Teo

 

  • New Zealand Q3 CPI higher than RBNZ forecast
  • RBNZ to pause in October before easing in December
  • Strong NZD to increase RBNZ dovish bias; intervention likely
  • Weaker NZD/USD to 0.64 remains likely

 

 

 

New Zealand Q3 CPI higher than RBNZ forecast

New Zealand’s inflation in the third quarter was steady at 0.4%yoy (Q2 CPI revised higher from 0.3% to 0.4% yoy). This is slightly higher than market expectations and the RBNZ forecast. The stronger print was influenced by housing related prices, particularly in Auckland. Tradable inflation edged higher from -1.8%yoy to -1.2%yoy as the effects of previous  depreciation in the New Zealand dollar (NZD) filter through. On the other hand, non-tradable inflation declined from 2.1%yoy to 1.5%yoy, the lowest level since 2001.

 

RBNZ to pause in October before easing in December

Since the RBNZ decided to lower the Official Cash Rate (OCR) by 25bp to 2.75% in September, Q2 GDP print was 0.1bp lower than the central bank’s forecast. On the other hand, Q1 GDP was revised 0.1bp higher. Business confidence pessimism has also eased while house price inflation remains a concern. In addition, consumer confidence has improved and the manufacturing and service sectors expansion trend remain firm. Dairy auction prices have also rebounded by about 60% since the low in August. Hence the Reserve Bank of New Zealand (RBNZ) is likely to pause later this month as they assess the effects of previous 75bp rate cuts in June, July and September this year. Looking ahead, we still expect a 25bp rate cut in December as dairy auction prices are still 15% below this year high and about 50% below 2013 peak. In addition, there is a case to stimulate the economy given the weak domestic inflation.

 

Strong NZD to increase RBNZ dovish bias; intervention likely

Though the RBNZ is expected to keep the OCR unchanged later this month, we expect the RBNZ to increase their dovish tone on the strong NZD. Current levels in the NZD trade weighted index is about 7% higher than the RBNZ forecast by the end of this year. We expect the RBNZ to weaken the currency via a combination of rate cuts and intervention in the currency market.

 

 

Weaker NZD/USD to 0.64 remains likely

In our view, the NZD recovery from 0.63 in September to just below 0.69 overnight has largely run its course. The daily chart 200d EMA and weekly chart downtrend channel resistance around 0.70 is expected to provide strong resistance. Technical chart indicators also imply that the NZD is in overbought territory and bullish sentiment in the NZD is overdone. Though it is premature to call a peak, we favour fading the current relief rally in the NZD with a year end target of around 0.64.