New Zealand Dollar HIts Fresh Two-year Low after "Dovish" Reserve Bank of New Zealand Interest Rate Statement

- NZD falls RBNZ signals rates will remain lower for even longer.

- RBNZ flags "dovish" concerns about Kiwi and global economies.  

- NZD/USD is likely to see further losses ahead say CBA and ING. 

© Pavel Ignatov, Adobe Stock

The New Zealand Dollar extended losses Thursday after the Reserve Bank of New Zealand doubled down on May's message that Kiwi interest rates will remain at record lows for "some time to come", while also flagging growing risks to both domestic and global economies.

RBNZ governor Adrian Orr said late Wednesday the bank expects New Zealand's economy to be supported by household and government spending during the quarters ahead but that a recent slowdown in GDP growth suggests there is more "spare capacity" in the labour market than previously thought.

"The best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period," Orr says, in a prepared statement.

The NZ Dollar extended its poor run as markets resigned themselves to the fact that the currnecy would not find support via the interest rates channel anytime soon.

The NZD/USD rate was quoted 0.40% lower at a fresh two-year low of 0.6761 during the morning session in London Thursday while the Pound-to-New-Zealand-Dollar rate was at 1.9352 looking to make another assualt on the one-month high registered only hours earlier.

The global economy remains in robust condition too, according to Orr, but the outlook for growth has been "tempered slightly by trade tensions in some major economies".

President Donald Trump has, after all, imposed a series of tariffs on goods imported into the US ranging from steel and aluminium to Chinese industrial products. He has also floated the idea of levying tariffs on imported cars.

"The Bank did take the opportunity to highlight the downside risks to the domestic AND global economy. As such compared to the May statement, it did read a touch dovish. TD's official RBNZ call for it to hike has also been pushed out from Feb 2019 to May 2019, but retained the November 2019 hike to have the cash rate at 2.25% by yr end next year," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities. 

The combined remarks were taken by the market as a suggestion that, if anything, New Zealand's main interest rate may now have to remain at its record low for even longer than it might otherwise have done. This is another negative development for the Kiwi Dollar.

"Overall, this Review sounded slightly more dovish than previous RBNZ communications," says Dominick Stephens, chief economist at Westpac. "The RBNZ is becoming less bullish about economic growth. We were surprised that the RBNZ shifted its view on that today."

Stephens flags comments made by the RBNZ about the government's "spending impulse" being slightly lower than previously thought as grounds for thinkin the central bank is now becoming less confident in the outlook for Kiwi growth.

This "dovish" tone tells the Westpac economics team the RBNZ may cut its forecasts for New Zealand growth in its August set of projections and that it could signal to markets it may now be even longer before it raises the cash rate from the record low of 1.75% that it has sat at since November 2016.

worth noting a major bearish technical pattern in NZD/USD is close to completion: IF it sustains a break below 0.6780 - a head and shoulders neckline - then the risks are skewed towards a very large fall pic.twitter.com/SZj688CyVk

— Imre Speizer (@ImreSpeizer) June 27, 2018

"We were very surprised to learn that the RBNZ views the Government’s projected spending as less stimulatory than before. Part of the difference of opinion may relate to KiwiBuild," says Stephens. "Presumably, the RBNZ views the KiwiBuild delay as more important than the ramp up in Government spending. By contrast, we don’t view KiwiBuild as particularly important for the economic outlook, because it will mostly displace private sector building that would have occurred anyway."

The NZD/USD rate was quoted 0.40% lower at a fresh two-year low of 0.6761 during the morning session in London Thursday while the Pound-to-New-Zealand-Dollar rate was unchanged at 1.9325.

The outlook for Kiwi interest rates was bleak already a long time before markets became concerned about President Donald Trump's now-apparent push to reduce the US trade deficit. This has seen the White House impose tariffs on goods from China, the North American Free Trade Agreement countries and the EU, stoking fears of a so called "trade war".

Adrian Orr told markets in May that Kiwi interest rates will remain at their current lows "for a considerable period of time" and that the next move could be either up or down, prompting a renewed sell off in the New Zealand Dollar. 

Changes in interest rates, or hints of them being in the cards, impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"Investors aren’t really expecting much action from the RBNZ anytime soon. Inflation remains the primary catalyst for officials to change course – with the focus here on the 2Q CPI report (16 July)," says Viraj Patel, an FX strategist at ING Group. "Domestic drivers for the kiwi have been few and far between in 2018 – with the currency trading in line with global market forces. With stock markets wobbling, the bias for NZD/USD remains skewed to the downside."

An ongoing slowdown in Kiwi growth is seen cementing the RBNZ into its "on hold" stance until well into the 2019 year, with pricing in overnight-index-swaps markets implying a March 21, 2019 cash rate of just 1.81%, suggesting little more than a 20% probability the RBNZ will have raised interest rates by then. This is a problem for the Kiwi currency.

New Zealand's Dollar had seen a strong start to the year when it rose by more than 5% over the US Dollar during the eight weeks to the end of February however, this increasingly downbeat outlook for monetary policy has driven the Kiwi down by 7% against the Dollar since late April, making for an almost bottom-of-the-league performance.

Headwinds for the Kiwi have been made worse by rising US interest rates that have forced American bond yields higher and shocked the US Dollar back into life. New Zealand's 10 year Treasury yield has fallen precipitously in 2018 while the US 10 year Treasury yield has risen to multi-year highs above the 3.1% level.

This means that investors are incentivised to sell Kiwi Dollars and to buy the greenback in order to invest in the American bond market rather than vice versa. This is the opposite of how the so called carry trade, which has traditionally propped up the Kiwi relative to its international peers, used to work.

Business Confidence Returns to Post-election Lows

June's ANZ Business Confidence index came in at -39.0, down from -27.2 in May and marking the joint lowest level for the index since November 2017, when a Labour-led coalition swept to power following an inconclusive election. This means 39% of firms polled in New Zealand's most influential business survey were pessimistic in their outlook for the next 12 months.

"We like to take special notice of firm’s 'own activity'. The survey of firm’s 'own activity' which fell to its lowest level this year, tends to have a better fit with New Zealand real GDP, and most notably with NZD/USD," says Richard Grace, chief currency strategist at Commonwealth Bank of Australia.

While the index reading compiled using firms' assessments of their own situation also fell, the decline was less steep than in the headline confidence number and the own activity index remains in positive territory, at 14 for June. Retailers are the least optimistic about the future, which may have to do with the steep rise in the minimum wage announced by the government in recent months, while manufacturers are the most upbeat in their outlook.

"Our composite GDP growth indicator combines business expectations and intentions with consumer confidence. This remains expansionary (with robust consumer confidence providing support), but suggests the economy may continue gently losing steam over coming months, despite the support coming from fiscal stimulus and high commodity prices," says Liz Kendall, a senior economist at Australia and New Zealand Banking Group.

Wednesday's business confidence barometer comes closely on the heels of last week's first-quarter GDP report, which showed New Zealand's economy slowing further during the initial three months of the year and for the 12 months to the end of March. It also comes ahead of the latest monetary policy statement from the Reserve Bank of New Zealand. The RBNZ will announce its latest decision at 22:00 London time.

"NZD was the worst-performing major currency by far. It fell throughout the European and much of the US day yesterday. It managed to stabilize a bit at the end of the US day, but then took a further lurch downwards after the ANZ Survey of Business Opinion showed a fall in business confidence," says Marshall Gittler with ACLS Global. "Today's outturn of -39.0 is down from -27.2 previously and near the -39.3 November 2017 low. These are the lowest levels since the 2008/09 Global Financial Crisis."

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