20 Jul 2015
RBNZ expected to cut, but what about huge NZD decline? - BMO
FXStreet (Guatemala) - Greg Anderson, analyst at BMO explained that this week’s central bank highlight is the policy meeting of the Reserve Bank of New Zealand on Thursday (9:00 local time, Wednesday 17:00 EDT).
Key Quotes:
"The RBNZ is widely expected to cut its base rate by 25bp to 3.00%, which would be the second cut of an easing phase that began last month. The arguments for the RBNZ to cut are straightforward. Inflation has been tepid, with Q2 data coming in at only 0.3% YoY for Q2. Economic growth is decelerating and confidence is waning. Export prices have deteriorated substantially over the past quarter."
"The only thing that would give the RBNZ pause is the ongoing strength of the housing sector, but with cash buyers from abroad driving the frothiest activity, it is unlikely that RBNZ rate policy can do much to deter a bubble."
"The key issues for the FX are the forward guidance on future interest rate policy and then the whole FX discussion. Money markets and the OIS curve have roughly 20bp more of rate cuts priced in for the 3 months following this week’s expected cut."
"If Governor Wheeler’s comments were to talk markets out of pricing in a third cut, then NZD could catch a bounce despite the rate cut. On the other hand, if Governor Wheeler hints that the RBNZ is on a path toward a 2.50% base rate over the next few months, then NZD/USD could collapse further. However, the move in NZDUSD over the past quarter has already been remarkable. A quarter ago in April, when Wheeler was continually frustrating the FX market with his calls for a weaker currency but steady rate policy, NZD/USD was stuck at around the 0.77 level."
"The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome.” In June, when NZD/USD was trading around 0.71, Wheeler said: “the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified…(and) needed to put New Zealand’s net external position on a more sustainable path.” With NZD down about 8% since that comment, will Wheeler be satisfied? My guess is that he will not be."
"I suspect that he will use the father deterioration in the terms of trade to argue that NZD is still overvalued. I think he will soften the wording a bit—probably saying that NZD is still ‘somewhat overvalued’ or ‘moderately overvalued.’ I would put the commentary on the exchange rate about on equal plane with the forward interest rate guidance in terms of how important it is for the NZD/USD reaction. If Wheeler decides to signal that no more rate cuts are likely, he could offset that with aggressive comments about the currency and hold NZDUSD at around 0.65 or so. Conversely, he could signal further cuts and not trigger further NZD/USD downside if he moderates his comments about the currency."
Key Quotes:
"The RBNZ is widely expected to cut its base rate by 25bp to 3.00%, which would be the second cut of an easing phase that began last month. The arguments for the RBNZ to cut are straightforward. Inflation has been tepid, with Q2 data coming in at only 0.3% YoY for Q2. Economic growth is decelerating and confidence is waning. Export prices have deteriorated substantially over the past quarter."
"The only thing that would give the RBNZ pause is the ongoing strength of the housing sector, but with cash buyers from abroad driving the frothiest activity, it is unlikely that RBNZ rate policy can do much to deter a bubble."
"The key issues for the FX are the forward guidance on future interest rate policy and then the whole FX discussion. Money markets and the OIS curve have roughly 20bp more of rate cuts priced in for the 3 months following this week’s expected cut."
"If Governor Wheeler’s comments were to talk markets out of pricing in a third cut, then NZD could catch a bounce despite the rate cut. On the other hand, if Governor Wheeler hints that the RBNZ is on a path toward a 2.50% base rate over the next few months, then NZD/USD could collapse further. However, the move in NZDUSD over the past quarter has already been remarkable. A quarter ago in April, when Wheeler was continually frustrating the FX market with his calls for a weaker currency but steady rate policy, NZD/USD was stuck at around the 0.77 level."
"The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome.” In June, when NZD/USD was trading around 0.71, Wheeler said: “the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified…(and) needed to put New Zealand’s net external position on a more sustainable path.” With NZD down about 8% since that comment, will Wheeler be satisfied? My guess is that he will not be."
"I suspect that he will use the father deterioration in the terms of trade to argue that NZD is still overvalued. I think he will soften the wording a bit—probably saying that NZD is still ‘somewhat overvalued’ or ‘moderately overvalued.’ I would put the commentary on the exchange rate about on equal plane with the forward interest rate guidance in terms of how important it is for the NZD/USD reaction. If Wheeler decides to signal that no more rate cuts are likely, he could offset that with aggressive comments about the currency and hold NZDUSD at around 0.65 or so. Conversely, he could signal further cuts and not trigger further NZD/USD downside if he moderates his comments about the currency."