NZD Interest Rate Remains Unchanged

NZD interest rate remains highest of all major currencies. It means the Kiwi can remain supported on risk appetite due to its higher yield. However, we remain bearish on Kiwi leading into the December interest rate decision, as there is a good probability of a cut at that meeting.

NZD Interest Rate:

Official Cash Rate: 2.75%

Last Change: September 10, 2015 (2.75%)

Expected Future Change: OIS pricing a 50% chance of a cut

Next decision: December 9

Inflation:

Inflation Target: 2% (1-3%)

Period: Year ending September 30

CPI: 0.4% Prior: 0.4% (revised from 0.3%)

Core: 0.8% Prior: 0.8% (revised from 1%)

Next Release: Mid-January 2016

Employment:

Period: Q1

Employment Growth: -0.4 Expected: 0.4

Unemployment Rate: 6.0% Expected: 6.0%

Labour Cost Index: 0.4% Expected: 0.5%

Next Release: Feb 2016

Growth:

Period: Q1

GDP: 0.4% Expected: 0.5%

Next Release: December 17

Analysis:

The New Zealand dollar has pulled back over 450 pips against the US dollar since the October 15 high, largely due to USD strength, a lower GDT price index and a dovish RBNZ statement on October 29. The Kiwi weakness comes after the currency spent several weeks rallying, gaining over 650 pips against the Greenback since August.

The RBNZ kept rates on hold at 2.75% at the October 29 meeting, where there was an approximately 37% chance of a cut. Although the unchanged OCR was positive for the NZD, the accompanying statement was dovish and caused immediate downside in the currency. The RBNZ noted in the statement that additional easing measures are likely, which was the same as the prior statement, however they also added that continued appreciation of the NZD would require an even lower rate path. The RBNZ is notorious for jawboning their currency in an effort to drive it lower. The NZDUSD fell 50 pips immediately upon release. The addition of this sentence means that upside in the Kiwi should be capped heading into the December 9 meeting where there is an almost half chance of a 25 basis points cut to 2.5%.

CPI readings for Q3, although slightly beating economists’ expectations, showed a mere 0.4% increase in headline inflation since a year earlier and an increase in Core of 0.8% for the same 12 month period; this certainly leaves the RBNZ with room to cut further. The increase in CPI for the third quarter was 0.3%.

The GDT Price Index declined 7.9% at the latest auction on November 17. This was the third consecutive negative print after 8 weeks of gains for the index.

Second quarter gross domestic product on the expenditure side was up 0.2% on the quarter and 2.2% compared with the same quarter a year ago. On the output side, GDP was up 0.4% on the quarter, slightly missing growth expectations of 0.5%.

On the labor front, the unemployment rate increased to 6.0% in the September 2015 quarter (up from 5.9%). At the same time, 11K fewer people were employed than in the June quarter. This was the first quarterly fall in employment in three years. Until recently, the labor market has been keeping pace with New Zealand’s population growth, but in the past three months this has changed. Q3 also had the largest increase in the number of people outside the labor force since the March 2009 quarter.

The RBNZ have stated that they remain data dependent; we will be looking out for important data over the coming weeks to inform us of the chances of another 25 basis point cut. Currently the OIS market is pricing in a 50% chance of a 25 bps cut at the December meeting. In terms of analysts, 15 of 18 Bloomberg analysts polled expect a 25 bps cut.

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