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NZD slides as RBNZ hints at rate cuts

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The New Zealand dollar fell sharply this morning, down 0.70% at one point after the RBNZ released its economic update. In the report, the central bank said “At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.”

The kiwi fell on the news but as noted in yesterday’s commentary, the strong support level at 0.70 is likely to slow down the declines. The RBNZ’s economic update comes after the central bank had previously tightened mortgage lending rules, curbing capital inflows from foreign investors and thus easing the demand on the NZD.

On the exchange rate, the RBNZ noted its displeasure on the NZD’s steady appreciation. The economic report said, “The trade-weighted exchange rate is 6 percent higher than assumed in the June Statement, and is notably higher than in the alternative scenario presented in that Statement. The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective.  A decline in the exchange rate is needed.”

According to RBNZ Governor Wheeler, the current outlook for inflation at 0.40% was significantly weaker than what was expected in June.

Following the RBNZ’s economic report, the kiwi fell as investors adjusted to the news. Expectations that the RBNZ will deliver at 25bps rate at its next meeting on August 11 and another 25bps rate cut in November kept the downside pressure on the NZD. The RBNZ’s official cash rate (OCR) stands at 2.25% currently, marking an all time low in interest rates. Capital Economics’ Paul Dale said that the RBNZ will have to cut interest rates to below 2.0% in order to bring back inflation within the 1 – 3% target rate.

ASB Sr. economist Jane Turner said that the RBNZ’s statement calling for a weaker exchange rate points to significantly lower interest rates, saying “This suggests the RBNZ has opened the door to OCR cuts below 2 per cent, a move the RBNZ had previously indicated a very high threshold for doing so.”

From a technical outlook, NZDUSD is likely to hover around 0.70 support currently. A bearish close below this support and potential retracement back to establish resistance could clearly invalidate the medium term bearish head and shoulders pattern. However, in the event that NZDUSD manages to post a bounce above 0.70, then 0.72 – 0.725 remains a good level to watch for an eventual move to the downside.

NZDUSD Technical Outlook: Watch for a bounce off 0.70 support
NZDUSD Technical Outlook: Watch for a bounce off 0.70 support
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