NZD plummets as RBNZ points to imminent rate cut

Summary:

• Reserve Bank of New Zealand indicates a rate cut is more likely given the weaker global economic outlook
• NZ dollar declines 1.5% as traders reprice a risk of lower rates
• Profits of China’s industrial companies fall to the lowest since 2011

RBNZ joins dovish chorus

The New Zealand dollar is plunging 1.5% this morning being by far the worst performing major currency after the Reserve Bank of New Zealand pointed to an imminent rate cut. At its March meeting the RBNZ left rates unchanged as widely expected but it notably altered its statement. The bank wrote that “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.” This wording sent the kiwi plummeting immediately by 100 pips as this sentence reflected a clear shift in the RBNZ’s rhetoric. On top of that, the bank signalled the balance of inflation risks shifted to the downside. Let us remind that the central bank revised down its price growth projections during the prior meeting this year and this change is unlikely to be reversed in May when another Monetary Policy Statement is released. Interestingly, the RBNZ pointed that while employment was near its maximum sustainable level, core consumer price inflation remained below the 2% objective necessitating continued supportive monetary policy. In short, the bank admitted that the Philiphs curve broke down, thereby it must keep monetary conditions loose. After the meeting the market-based probability of a rate decrease in May jumped to over 30% from just 2% yesterday. In turn, the odds for a rate cut in August stand currently at 67%. To sum up, the RBNZ probably had to alter its stance so as to avoid undue upward pressure on its currency after such central banks as ECB, Fed or RBA softened markedly their stance. Taking into account that the NZ dollar is placed among the most overvalued G10 currencies the bearish trend could last for some time.

The NZDUSD bounced off its medium-term trend line and it seems to be in a position to keep falling. Some important technical supports might be localized at 67, 66 and 65.2. Source: xStation5

Another reason to worry about

Over Asian hours trading we got data from China on industrial companies’ profits. Their profits dropped as much as 14% YoY in January/February (combined) producing the worst performance since October 2011. Keep in mind that this result followed a 1.9% YoY decline in December marking a continuation of a losing streak. Note the data was released for two combined months in order to get rid of any distortions regarding the Lunar New Year. Furthermore, coal companies’ profits slumped 23.2% while chemicals profits crashed 27.2% in annual terms. A drag on profits was mainly due to price contractions in key industrial sectors such as auto, oil processing, steel and chemical industries, as Reuters reported. The bleak data has not spooked investors. The Shanghai Composite is trading 0.4% higher while the Hang Seng (CHNComp) is rising 0.7%. On the other hand, the Japanese NIKKEI (JAP225) closed 0.25% lower while the Australian S&P/ASX200 (AUS200) gained 0.1%.

Industrial companies’ profits slumped at the beginning of this year sending another warning signal for the global economy. Source: Bloomberg

In the other news:

• UK MPs have proposed as many as 16 options for votes on Wednesday as they are seeking alternatives to the May’s Brexit deal

• US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are due to visit Beijing on Thursday and Friday