NZD supported as stronger than expected Q1 GDP pares rate cut risk
This morning, the New Zealand dollar (NZD) benefited not only from a weak US dollar sentiment but also lower risk that the Reserve Bank of New Zealand (RBNZ) will lower the Official Cash Rate (OCR) later this year in August. The latter was triggered by economic growth in the first quarter of this year expanding at a faster pace than the RBNZ’s projections. The main driver behind the economic expansion was construction and health industries. Separately dwelling sales growth slowed from 18.4% to 13.6%yoy in May, but remains above trend rate. Further macro prudential tools are likely to be implemented to address concerns surrounding the housing market later this year. The strength in the NZD trade weighted index, which is more than 4% stronger than the RBNZ’s forecast, is likely to weigh on tradable inflation. Hence should inflation in the second quarter (18 July) come in weaker than the RBNZ’s forecast of 0.6%, the risk of a 25bp rate cut in August will increase. The latter is only about 50% priced in by financial markets. A stronger NZD is likely towards 0.72 in the coming weeks (assuming no Brexit) before easing lower to 0.68 in the third quarter.
RBA likely to lower OCR by 25bp in August despite better than expected employment numbers in May
In Australia, the stronger than expected employment print in May has not changed our view that the Reserve Bank of Australia (RBA) is likely to lower the OCR by 25bp to 1.5% later this year in August. Employment gains in May rose from 0.8k (revised down from 10.8k) in April to 17.9k, supported by gains in part time employment. There was nil gains in full time jobs in May and April full time jobs were revised lower from -9.3k to -18.2k. In fact, full time jobs declined by almost 60k in the first five months of this year. As financial markets have not fully priced in a 25bp rate cut in August, we do not expect strong gains in the Australian dollar (AUD) in the current weak US dollar sentiment. We maintain our third quarter AUD target of around 0.72.