RBNZ November Monetary Policy: Expected to cut OCR by 25bps

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The Reserve Bank of New Zealand’s monetary policy meeting due on Wednesday, November 9th is expected to see the central bank lower the overnight cash rate (OCR) by 25bps in all likelihood. The rate cut would bring the New Zealand interest rates from 2.0% to 1.75% at today’s meeting.

Despite an uptick in the most recent jobs report and the inflation expectations seen rising by 0.02 percentage points (followed by a subsequent revision earlier this week to 0.4%) and an increase in global dairy trade index, the central bank is expected to maintain its easing cycle.

New Zealand Jobless rate in Q3 slips to 4.9%

The latest quarterly data from Statistics New Zealand, released last week showed an upbeat number on the jobs front. The unemployment rate fell to 4.9% in the third quarter of 2016, marking the lowest unemployment rate since December 2008. The data beat estimates of 5.1%.

On a quarterly basis, the employment change was 1.4%, which was above estimates of 0.5% but slower than the 2.4% increase seen in the second quarter. The annual employment change rose to 6.1%, up from 4.5% in the previous quarter. The participation rate also edged higher, rising to 70.1, according to the official reports.

New Zealand Unemployment Rate Q3, 2016: 4.9%
New Zealand Unemployment Rate Q3, 2016: 4.9%

Labour and income statistics manager Mark Gordon said about the unemployment report that “this strong growth in employment, coupled with fewer unemployed people, pushed the unemployment rate below 5.0 percent for the first time in nearly eight years.”

While the unemployment report might have held some hope for the RBNZ to keep rates steady, the data showed that wage growth was still struggling to rise despite declining spare capacity, which is expected to keep the outlook for underlying inflation subdued.

Last week, official data also showed that the inflation expectations, as measured by the central bank were little changed in the fourth quarter. The two-year forward-looking indicator nudged by a modest 0.02 percentage points to 1.68%.

Analysts at Westpac note that “inflation expectations have been fairly stable over the past few quarters, but expectations remain below the inflation target mid point of 2%” which suggests further rate cuts from the RBNZ this week.

New Zealand Inflation Rate y/y Q3, 2016: 0.4%
New Zealand Inflation Rate y/y Q3, 2016: 0.4%

On Monday, November 7th, Statistics New Zealand released revised CPI figures for the third quarter. According to the new data, the revised headline inflation was registered at 0.3% q/q, up from 0.2% previously. The revision saw the yearly inflation rise to 0.4%, up from 0.2% previously. Still, despite the revision, inflation remains weak, and the revision is unlikely to deter the central bank from cutting rates.

The RBNZ’s possible rate cut also seems to be priced in by the markets, which shifts the focus of the central bank’s meeting to its forward guidance. Many experts believe that the RBNZ could stand pat on further easing, which will impact the market reaction. A potential shift from this view with further easing bias could weigh on the NZD.

NZDUSD – Biased to the downside, could test $0.68 this quarter

Monetary policy divergence could be the key driver once the dust from the US election settles. With the RBNZ in an easing mode and the Fed likely to hike the fed funds rate in December (which is now questionable based on the recent US election developments and the market reaction to the news), the NZDUSD could be coming in for a correction in the near term.

NZDUSD (0.7316): Head and Shoulders pattern in the making
NZDUSD (0.7316): Head and Shoulders pattern in the making

The Kiwi rallied to a two-month high yesterday building up on strong gains since early October. While yesterday’s rally saw the NZDUSD rise to $0.7403, the gains could be short-lived. The technical chart for NZDUSD shows the potential bearish head and shoulders pattern in the making, which will be validated on a breakdown below the rising neckline support, connecting 25th July and 13th October lows of 0.6957 and 0.7035.

Short term support is identified at 0.7250 – 0.7230. A breakdown below this support will confirm the move to the downside as NZDUSD is likely to test the rising neckline support. Following a breakdown below this neckline support, NZDUSD could be seen targeting 0.6800.

Alternately, if NZDUSD bounces off the support at 0.7250 – 0.7230 and pushes higher, to form a higher high above 0.7403, the bearish bias remains invalidated with the price likely to consolidate at those levels.

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