RBNZ to decide on Interest rates today

Dec 09, 6:45 am
NZRB kiwi bank

The Reserve Bank of New Zealand is due to meet late this evening for its final monetary policy review for this year. Heading into the meeting, the expectations are for the RBNZ to deliver a 25bps rate cut, bringing down the benchmark interest rates from 2.50% to 2.25%. If the RBNZ does indeed cut rates, it would bring the New Zealand interest rates to where they were just a year before since the New Zealand Central Bank started its rate hike cycle. The RBNZ last cut interest rates on September 9th, 2015 by 25bps, bringing the Cash rate from 3.00% previously to 2.75% where it stands today. At the previous meeting on October 28th, 2015, the RBNZ kept rates on hold.

RBNZ Interest Rate Cycle (2014 – 2015) Source: Tradingeconomics.com
RBNZ Interest Rate Cycle (2014 – 2015) Source: Tradingeconomics.com

The RBNZ Governor, during his speech in early November after presenting the RBNZ Financial Stability report clearly ruled out hiking rates, noting that the probability for hiking rates against the backdrop of house price pressures and weak daily data was negligible. He said that some further reduction to the cash rate is warranted to counter the falling commodity prices and weak demand for exports due to a global weak economy.

Most economists polled expect the RBNZ to cut rates at today’s meeting, although some argue that with the New Zealand economy growing at a pace of 2.0% and benign inflation, there is no need to cut rates at this meeting.

New Zealand Economy (Sep 9 – December 9, 2015)

Since the last rate cut on September 9th, here’s a quick recap of the New Zealand economy.

  • GDT Price Index: On September 1st GDT price index increased 10.9% and increased to 16.5% on the 15th of September and eventually rose 9.9% on October 6th. The dairy trade index then contracted -3.1% on October 20th. Overall, the GDT price index has made decent gains on average.
  • Consumer Inflation q/q: The quarterly CPI increased 0.30%, beating estimates of 0.20%, but inflation was a bit weaker from 0.40% increase in the previous quarter.
  • GDP q/q: The quarterly GDP increased 0.40%, up from 0.20% previously but failed to match expectations of 0.50% increase

Taken in perspective, the economic data hasn’t been very bad that could shift the sentiment towards a rate cut today. While it will be a close call on whether or not the RBNZ will cut rates, the NZDUSD on the other hand has continued to trend higher gradually, highlighting the fact that at 25bps rate cut is not factored into today’s RBNZ event, which highlights a risk of a strong downside pressure if the Central Bank does indeed go ahead as expected.

NZDUSD – Technical Outlook

From the weekly charts, NZDUSD closed last week on a bullish engulfing note after prices remained range bound for the past three weeks. The weekly Stochastics has printed a bullish divergence forming a higher low against the lower low in prices. Support has been established at 0.6523 with prices forming a base at this level few weeks ago. If the bullish divergence kicks in, NZDUSD is poised for an eventual rally to 0.7267 followed by the final objective towards 0.7769.

The weekly chart median line shows prices currently testing the lower median line. If prices are rejected 0.661, the bias remains to the upside.

NZDUSD - Weekly Chart, 09/12/2015
NZDUSD – Weekly Chart, 09/12/2015

On the daily chart, support level comes in at 0.65234 – 0.64716, while resistance was formed at 0.68517. There is a bearish divergence on the 4-hour chart which points to a downside correction towards 0.65772. Therefore, we expect NZDUSD to dip towards the main support level between 0.65772 – 0.64716 level before a potential rally to the upside. A weekly close below 0.64716 would invalidate the upside bias and could keep NZDUSD poised to test the previous lows at 0.623.

NZDUSD - Daily Chart, 09/12/2015
NZDUSD – Daily Chart, 09/12/2015

From the above, we can, therefore, conclude that NZDUSD is likely to dip to the support near 0.6577 – 0.6471. If support is established here, prices remain poised to the upside in the near term, sometime next week targeting 0.6851, 0.7268, 0.777 eventually.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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