MACRO

The kiwi and the doves

Lee Hong Wei

Singapore Sales Trader

Disappointing inflation data from New Zealand have pushed the country’s central bank to join the global dovish chorus. The latest release came in at 0.1% quarter-on-quarter versus an estimated 0.3% q/q as the kiwi fell by more than a cent versus USD after the print. This translates to a 1.5% year-on-year on an annualised basis, so well short of market expectations. It was also the first miss of the key CPI reading in two quarters. Consequently, the probability of a rate cut soared to more than 50% after the release.

Source Bloomberg : Inflation data

The Reserve Bank of New Zealand is targeting annual CPI inflation between 1% and 3% over the medium term with a focus on keeping future inflation near the 2% mid-point. Weakening business confidence has prompted a majority of economists to forecast rate cuts in 2019. Employment data, which do not ordinarily weigh heavily on NZD, pushed kiwi notably lower on February 7 of this year when a marginal wage growth release lessened the probability of an OCR hike.

The RBNZ started the calendar year with next to no probability of a 2019 cut priced in, with markets forecasting a 15% chance. That figure has since risen to a 76% chance of a cut by Q3’19. This comes as no surprise as many global central banks have shifted to dovish stances of late, and there is no real reason for the RBNZ not to follow suit.

The chart below shows the probability of an RBNZ rate cut at the June meeting, as measured since the start of this year.

Source : Bloomberg – Probability of cut for RBNZ for June meeting

The odds of a rate cut fell slightly last week when RBNZ governor Adrian Orr stated that he isn’t particularly worried about the recent slowdown in New Zealand economic growth in a relative sense; that pulled NZDUSD higher as of last week’s close with the pair supported at the 0.660 level. However, we should recall that Orr also painted a dovish picture at the February RBNZ meeting, when he commented that a cut could be required if growth doesn’t pick up.

At the central bank’s March meeting, the RBNZ also cited the weak global economic outlook, noting that that the course of the next OCR move will be down or – at best – neutral.

From a technical perspective, NZDUSD has stayed in a 200-pip trading range since the start of the year, bounded by the 200-week moving average and the Fibonacci 50% retracement confluence. On the daily chart, we see a rebound after the RSI reading probed oversold territory, but overhead resistance remains key at the 0.6750 level.

Source : Bloomberg – NZD weekly chart
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