RBNZ to likely cut rates; may be its last but kiwi not yet convinced – Forex News Preview


Raffi Boyadjian, XM Investment Research Desk

The Reserve Bank of New Zealand is expected to cut interest rates for the third time this year on Wednesday (01:00 GMT) as growth worries persist in the export-driven economy. Despite some tepid signs that the recent reductions in borrowing costs are starting to feed through to the New Zealand economy, the risks remain tilted to the downside. Nevertheless, the decision is expected to be a close one and any hints that policymakers are steering away from further monetary easing could spark buying interest in the local dollar.

Data not yet convincing enough for RBNZ to pause

The RBNZ led the way among global central banks in the latest wave of policy easing and has slashed its official cash rate by 75 basis points since May. However, unlike in some other economies such as the United States where growth appears to have stabilized and may even be regaining some traction, there’s yet to be any notable rebound in economic activity in New Zealand.

Inflation fell to 1.5% year-on-year in the third quarter, and although this was slightly above expectations, it’s been stuck within the lower half of the 1-3% target band for more than two years. Inflation expectations have also started to fall again and the RBNZ’s next quarterly expectations survey – due on Tuesday – could prove to be the deciding factor for policymakers.

Looking at the RBNZ’s other mandate – full employment – things aren’t very encouraging either. The country’s unemployment rate jumped from 3.9% to 4.2% in the third quarter and jobs growth slowed from 0.8% to 0.3%.

Green shoots in business confidence?

The rate cuts appear to have at least started to lift business morale – the ANZ Business Confidence Index rose in October for the first time in five months, but it remains near a decade low. Much of where the economy goes from here now depends on how the US-China trade war plays out over the coming months.

The United States and China – New Zealand’s largest export market – are close to signing a preliminary trade agreement that could see some of the recently imposed tariffs on each other’s goods being rolled back. A partial trade deal would also boost the chances of a more comprehensive deal being reached later on. If the trade hostilities continue to subside, it would remove the urgency for the RBNZ to act again in the near term.

RBNZ unlikely to shut door on further rate hikes

Investors will therefore be scrutinizing the RBNZ’s statement and Governor Adrian Orr’s language in his press conference for possible clues that the easing cycle is coming to an end. The RBNZ will also be publishing its quarterly economic projections on the same day, which should provide a further insight into policymakers’ thinking. Although it’s highly unlikely that the central bank will close the door on further rate cuts, any change of tone regarding the outlook to a more positive one is sure to fuel bets that the bar for additional easing has gone up.

If that’s the case, the New Zealand dollar could bounce off the immediate support around $0.6340, which is the 50-day moving average and the 23.6% Fibonacci of the July-October downtrend, to turn higher and re-challenge the 38.2% Fibonacci at $0.6426. A successful break above this resistance would clear the way for the 50% Fibonacci at $0.6496.

A rate cut is only 60% priced in by the markets so it would not be totally unreasonable to expect the RBNZ to stand pat in November. A surprise decision to keep the cash rate unchanged at 1.00% would make the $0.65 level an easy target for the kiwi bulls.

Dovish tendencies

However, it’s still not certain whether the RBNZ is ready to signal a pause despite the trade optimism, and given the Bank’s dovish tendencies, maintaining an easing bias is more likely than not. That may explain why the kiwi’s rebound from 10-year lows brushed on October 1 has been modest relative to its 2019 declines.

A reaffirmation of the easing bias could push the kiwi below the $0.6340 level, bringing the 10-year low of $0.6201 back within reach.