New Zealand Dollar Forecast Lower on 'Galling' RBNZ Decision, But a NZD Recovery Will Come

The pound continues its recovery against the NZ dollar in the wake of a surprise interest rate cut at the Reserve Bank of New Zealand.

• RBNZ lacks common sense say BNZ, decision to cut rates branded 'galling'
• “The second time in two years that we have listened to a speech by Graeme Wheeler and been stupid enough to pay attention to it” - Stephen Toplis, BNZ.
• Pound's technical recovery targets 2.16
• "We confirm our expectations for a weakening of the New Zealand dollar in the near term" - Luca Mezzomo at Intesa Sanpaolo

The New Zealand dollar slid substantially as the RBNZ catches markets in an offside position and cuts interest rates in a per-emtive strike on the NZD which has been strengthening for some time now.

Understandably some analysts are unhappy with this turn of events having been wrong-footed on their forecasts by the move.

The decision to lower rates to 2.25% from 2.50% also came with the implicit warning that further cuts to 2.0% were likely.

Following the RBNZ rate cut this morning, Citi Economics now expect a further 25 bps cut in April for a new low of 2.00%.

"Once there, Governor Wheeler is likely to provide qualitative guidance that further policy easing may be required though Citi does not expect the OCR to plunge further," says a note from Citi on the matter.

The NZD basket fell 2.0% in the wake of the move with the NZDUSD down roughly 1.5 cents to 0.6650 and the NZD/AUD off over a cent to 0.888.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3118▼ -0.04% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2332 - 2.2424
**Independent Specialist	2.2794 - 2.2887 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

If you had read Pound Sterling Live in the hours preceding the event you would have been a little more wary - we reported the views of Sharon Zollner, Senior Economist at ANZ Bank who warned of the potential for a pre-emptive strike on the NZD’s value.

BNZ Not Happy With RBNZ Guidance

Reactions to the move continue to come in, and none are more entertaining than the analysis of Stephen Toplis at BNZ who says the Reserve Bank lacks common sense.

Toplis says the RBNZ decision to cut rates shows a lack of finesse at the RBNZ.

“We should have known better. The RBNZ has taken the above-expected TWI, the lower than expected inflation expectations outcome, weaker global growth and a drop in commodity prices and poked all these things mechanistically into its model.”

“Common sense not a model variable.”

Toplis says what's missing in this process is:

• Consistency with past RBNZ commentary;
• Any strong rationale that the rate cut will affect the desired objective of getting inflation to 2.0%;
• Any evidence that low inflation is causing a significant problem to the economy anyway

"For us it's the consistency aspect (or lack of it) that is most galling. This is the second time in two years that we have listened to a speech by Graeme Wheeler and been stupid enough to pay attention to it," says Toplis.

Backing his assertion the analyst cites Wheeler's February speech in which a lot was made of the Bank's factor model showing core inflation to be at 1.6%.

A level which was seen as "encouraging" and "well within the target range".

“Now this core measure has been seemingly ditched and instead we are told we have "subdued core inflation relative to history across a number of measures,’” says Toplis.

But, the RBNZ is Good at Getting What it Wants

If you were the governor of a central bank and you wanted the most ‘bang for your buck’ you would have to catch markets by surprise.

If you want to lower the value of your currency and interest rate yields you cut rates when markets are least expecting it, and/or, you cut harder and faster than markets are expecting.

Reserve Bank of New Zealand Governor Wheeler knows this, and that is why he cut interest rates this March, just as markets were not expecting the move.

Of course some analysts will be peeved that they were caught wrong-footed by the RBNZ, but central banks do need to play a game of smoke and mirrors to get what they want.

Pound to New Zealand Dollar Exchange Rate Recovery Continues

What does this mean for the GBP to NZD rate?

The currency pair appears to have formed a base with markets unwilling to let the exchange rate trade below 2.08 for very long.

The overnight move that touched 2.14 will go some way in confirming the 2.08-2.12 region’s credentials as offering solid support.

We note too that the GBP/NZD has crossed its 20 day moving average which now sits at 2.1150 and will act as support over coming days.

The move higher is likely to extend, momentum willing, to the resistance point at 2.1635 which is the 50 day moving average.

The pound appears to be unable to cross the 50 day moving average in a number of other pairs confirming that this technical signal is indeed relevant.

BNZ see the NZ dollar drifting lower from current levels as the NZD TWI still remains almost 1% above the "new" level built into the RBNZ's forecasts for the June quarter of this year.

“We do think the NZD will continue to drift lower but it's less to do with what will happen onshore than what we expect to happen offshore," says Toplis, "and, of course, if this further reduction in interest rates does give the economy another boost then investors tend to demand the currencies of relatively well performing economies mitigating any impact that any interest rate differential change might impart."

Intesa Sanpaolo See Near-Term Weakness, Longer-Term Recovery

In the wake of the RBNZ cut analysts continue to recalibrate their expectations on the currency's direction.

Intesa Sanpaolo have stuck with their, what we consider quite a well-balanced view, that the NZD will likely fall in the near- to mid-term and recover in the longer-term.

"We confirm our expectations for a weakening of the New Zealand dollar in the near term, towards NZD/USD 0.62-0.60 on a 1m-3m horizon," says Luca Mezzomo Chief Economist at Intesa Sanpaolo.

.This is the time horizon on which the RBNZ may implement another interest rate cut, in full divergence compared to the Fed, which, by contrast, should resume hiking rates between 2Q and 3Q.

"In the longer run, we stick to our gradual recovery scenario, mostly on the back of the excellent pace of growth expected in the next two years. Alongside the downside revision of inflation, the central bank has revised upwards its growth projections, from 2.4% to 3.3% in 2016 and from 3.0% to 3.2% in 2017," says Mezzomo.