NZ dollar sinks on dovish RBNZ

9 August 2018

This content has been created by X-Trade Brokers Dom Maklerski S.A.

Summary:

  • RBNZ leaves rates unchanged as expected but pushes back the first rate hike forecast

  • Chinese CPI accelerates while PPI decelerates in July

  • Japanese machinery orders shows a tremendous decline in June

The New Zealand dollar sank on late Wednesday following the dovish outcome concluding the RBNZ meeting. Admittedly, the NZ central bank left interest rates on hold as broadly anticipated, it simultaneously slashed OCR forecasts pushing back the first rate hike projection until the end of 2020. The central bank also lowered its forecast for economic growth over the upcoming year citing a decline in business confidence, a cooler housing market as well as external risks to the NZ economy stemming from global trade tensions. On top of that, the bank substantially revised down its TWI estimate along the entire forecast window, but it just barely adjusted headline inflation estimations. Moreover, the central bank meaningfully revised down forecasts regarding the output gap suggesting that the degree of domestic-driven inflationary pressures lowered. As far as the long-term outlook is concerned, it needs to spot that the bank still expects that the number of net migration (permanently hired and long-term working people) will be declining thereby curtailing New Zealand’s potential growth being a drag on productivity as well.

The RBNZ cut OCR as well as output gap projections signalling no need for higher rates in the foreseeable future. Source: RBNZ

During his press conference RBNZ governor Adrian Orr did not provide investors with any hawkish remarks reiterating that the next move would be either up or down. He also acknowledged that the lower exchange rate should boot exports which in turn ought to foster economic growth in general. In terms of the currency itself Orr said that the NZ dollar is very close to its fair value (despite a huge decline it has seen recently) suggesting that the bank is unwilling to talk it up any time soon. Furthermore, he suggested that if they see a deterioration in growth they might have to “blow more wind into sails of the economy”. To sum up, there were nothing for hawks in either the statement or the Orr’s press conference. As a result, the NZ dollar is the weakest major currency this morning losing over 1% against the greenback.

The NZDUSD is extending its slide following the RBNZ meeting. Technically the key level is still 0.6695 and if the pair is able to end this week below it, one may suppose that more pain for the kwi would be in the offing. Source: xStation5

Beside the topic related to New Zealand it’s worth taking a look at the Chinese economy. China reported a lower trade surplus yesterday ini turn today the world’s second largest economy produced inflation numbers for July. When it comes to CPI it sped up to 2.1% from 1.9% while PPI cooled to 4.6% from 4.7%. Even as the July’s number did not bring substantial increases keep in mind that protectionist steps taken by the US might sooner or later inject more inflationary pressure into the Chinese economy. Given that the private non-financial debt in China hovers around 20% of GDP it illustrates that higher inflation, and possibly rates as well, would dent growth there substantially spilling over the rest of the world. The last point being worth mentioning is the latest machinery orders release from Japan. The data showed that orders slumped 8.8% on a monthly basis falling short of the median estimate at -1%. In annual terms we got a modest 0.3% increase while the consensus had expected a 10.5% pick-up. One needs to be aware that this is a very volatile set of data hence one month did not mean a massive change in trend. However, given that the central bank seems to be slowly preparing for a bit more hawkish policy the incoming economic data may be especially relevant.

This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.