New Zealand Dollar Savaged on Interest Rate Cut Predictions

Above: High NZ house prices, lead by Aukland, may be ignored by the RBNZ.

The NZ dollar is the under-performer in global foreign exchange markets as we head into May.

At the start of the new month we see the New Zealand dollar (NZD) under selling pressure as decision-makers at the Reserve Bank of New Zealand (RBNZ) mull an interest rate cut.

We warned that the April OCR event would be pivotal for the NZD; judging by the deep sell-off in NZD it would appear currency markets did not share our view and were caught wrong-footed.

The Kiwi dollar has been strong for a number of years now thanks to the economy's weathering of the global financial crisis and recession.

This has allowed the RBNZ to keep interest rates high, in turn global capital has flowed into New Zealand to take advantage of this high yield keeping the value of the currency high.

The ship could now be about to turn.

Rates to Reference

• The British pound has broken back above the 2.0 area, at the time of writing the GBP-NZD exchange rate is at 2.0244.
• The euro v NZ dollar exchange rate (EUR-NZD) is at 1.4852.
• The NZ dollar v US dollar rate (NZD-USD) is at 0.7575.
• The Aussie v Kiwi exchange rate (AUD-NZD) is at 1.0408.

* All currency quotes mentioned here refer to the wholesale market. Your bank will affix a discretionary spread when transferring money internationally.

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Factoring in an Interest Rate Cut

Months ago we would have dismissed off-hand the prospect of a New Zealand interest rate cut - the domestic property market is far too hot to risk such a move.

Nevertheless, the RBNZ has cited the falling levels in general inflation as being a reason to consider such a cut.

“A significant reduction in inflation expectations would warrant [a rate cut]” the RBNZ told us in their previous review.

There are however further problems weighing on the mind of Governor Wheeler and his team:

“Lower dairy incomes, lingering effects of drought, fiscal consolidation, and the high exchange rate are weighing on the outlook for growth,” the RBNZ said in the April statement.

As such, “the door has widened further with today’s shift to an easing bias and we now narrowly expect a 25bp rate cut to 3.25%” says analyst Kieran Davies at Barclays.

Barclays had previously forecast unchanged rates until later next year.

With regards to timing, the RBNZ might wait for the Q2 CPI in late July, but Barclays see June as the most likely window for a cut given the RBNZ will update its economic outlook in the June Monetary Policy Statement.

Keep in mind risks to the view that NZD-negative risk rates lie ahead do remain.

1) the overall economy continues to do relatively well
2) renewed Auckland-led strength in house prices could be too much of a risk to inflame

Should data in the coming month suggest that either of the two points are indeed valid we would expect the New Zealand dollar exchange rate complex to creep back higher.