New Zealand Dollar Rally Halted on Chinese Trade Numbers, But Forecasting Strength to Return
The week ahead is dominated by the Reserve Bank of New Zealand’s (RBNZ) rate meeting on Wednesday March 9.
- NZD sees losses on shock Chinese Data
- Forecasting 2.0340 in the GBP/NZD
- Will the RBNZ target currency strength and inflation by cutting rates this week?
The New Zealand dollar is under pressure at the time of writing on news China’s Trade Balance data for February read at 32.59 BN USD, well below consensus forecasts for 50.15 BN USD and almost half the 63.29 BN reported in January.
Exports fell 25.4 percent on-year, double the amount analysts had forecast the decline to read.
"That shocking slide in exports was joined by at similarly weak, if not quite as alarming, 13.8% drop in imports; combine the two together and it is the kind of ugly reminder of China’s spluttering economy investors certainly don’t need at the moment," says Connor Campbell at Spreadex.
Commodity Prices are Improving, Spelling Higher Milk Prices
Despite the Chinese data the commodity complex is holding onto much of its recent gains giving us confidence that we are witnessing a short-term pullback.
“While we can point to iron ore market specific factors (and what we suspect was a lot of short covering), we’ve seen a recovery across the broader commodity complex of late. Oil, for instance, has done a rope-a-dope, and come out fighting in the recent rounds," says Cameron Bagrie, Chief Economist at ANZ.
At US$30/bbl, forecasts for US$20 were rife. Next stop US$40.
"That augurs better for dairy prices over the coming months; watch for a lift," says Bagrie of the prospects for New Zealand's key export.
Latest Pound / New Zealand Dollar Exchange Rates
  | Live: 2.3114▼ -0.06%12 Month Best:2.3553 |
*Your Bank's Retail Rate
| 2.2328 - 2.242 |
**Independent Specialist | 2.279 - 2.2883 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
RBNZ is the Big Risk
We will be watching for signs that the New Zealand central bank is growing impatient with subdued inflation and a strengthening currency at this week's RBNZ meeting.
The central bank has the highest base lending rate in the G10 at 2.50%, which makes it a target for carry traders, seeking yield.
The carry trade has arguably been one of the most important drivers of New Zealand dollar strength over recent years.
It is where global investors snap up New Zealand sovereign bonds, and other high-yielding financial products.
The funds used to purchase these products are borrowed from low interest rate jurisdictions, such as the UK, US and Eurozone where borrowing is at record lows.
This has posed a problem for policy-makers at the RBNZ, who would prefer their currency lower, since it has always gained an artificial prop from carry.
Fighting the NZD’s appreciation would be best conducted by a cut to interest rates, but high house prices complicate the picture.
Any rate cuts could push New Zealand’s red-hot property market to ever higher levels.
“We don’t expect a cut next week or all year, despite the slide in inflationary expectations,” say TD Securities in a weekly note to clients,
“The RBNZ has a lot more work to do to convince the population and markets that inflation is closer to 1.6% than zero.”
Apart from the RBNZ meeting, Card Spending (mom Feb) is out on Monday (-0.6% prev).
House Sales in February are out on Thursday (4.3% prev).
Business NZ Performance of Manufacturing (Feb) is also out on Thursday 10, (57.9 prev).
ANZ: The Case for a Rate Cut is Increasing
Not everyone shares the views held at TD Securities that the RBNZ is going to sit idle and watch the NZD trend higher.
According to an in-depth analysis by ANZ Bank, the economic and monetary situation in New Zealand now provides sufficient cause to expect the RBNZ to cut its OCR by at least 50 basis points in 2016, bringing it from 2.5% down to only 2.0%.
ANZ’s economic team cite three fundamental pillars supporting their increasingly dovish outlook;
The first is that, “a moderation in economic momentum, now appears to be around the corner at a time when inflation is weak,”
The second is, “global unease,” due to China’s problems – “and they (China) will export them.”
The third and final reason Is rising “funding costs” which if not “compensated for by monetary policy, will accentuate decelerating economic momentum.”
Pound to New Zealand Dollar Forecast
The GBP to NZD pair has been falling in a descending channel since rolling over after reaching a peak of 2.5209 in August 2015.
The down-trend is dominant and forecast to continue. 
There is a major support and resistance level at 2.0972 which provides an obstacle to further down-side pressure.
Nevertheless, a re-break below the current 2.0672 lows would probably confirm a resumption of the down-trend towards the next target for the pair at the S1 Monthly Pivot at roughly 2.0340.
