NZD Update 9th of October

The NZD still has the highest interest rate of all major currencies, as such there is a lot of room downward to close the gap with other economies if the data calls for it. We remain weakly bearish in the medium term, pending forthcoming data, and mildly bullish in the short term.

NZD Update:

Interest Rate

Official Cash Rate: 2.75%

Last Change: September 10, 2015 (2.75%)

Expected Future Change: OIS pricing a 28% chance of a cut at the next meeting

Next decision: October 28

Inflation

Inflation Target: 2% (1-3%)

Period: Year ending June 30

CPI: 0.3%

Core: 1.0%

Next Release: October 15

Employment

Period: Q1

Employment Growth: 0.3% Expected: 0.5%

Unemployment Rate: 5.9% Expected: 5.9%

Labour Cost Index: 0.5% Expected: 0.5%

Next Release: November 3

Growth

Period: Q1

GDP: 0.4% Expected: 0.5%

Next Release: December 17

Analysis

The RBNZ cut interest rates again at the September 10 meeting, decreasing the official cash rate to 2.75% as was widely expected. This was the third 25 basis point reduction in the OCR this year. The RBNZ said the cut was warranted by the softening of the economy and the need to keep future average inflation near the 2% mid-point of its target range. The Bank said that some future easing seemed likely but will be data dependent. This has kept the door open to further easing however the recent uptick in dairy prices has decreased chances of another cut at the October 28 meeting; the OIS market now prices 28% for a that event.

Several major investment banks are expecting more interest rate cuts over the coming six months. Recent global uncertainty stemming from China and weak commodities has also continued to pressure the Kiwi over the last six months due to New Zealand’s close economic ties to Australia and commodity-based economy.

The Kiwi pulled away from a one month low of 0.6235 against the USD (September 23) after Fonterra increased its farmgate price payout forecast. ANZ bank’s rural economist Con Williams said “The key message to take from the upward revision to Fonterra’s milk price forecast is that the impact of the downturn in dairy prices is not likely to be as severe as the Reserve Bank of New Zealand assumed in September.” This was supportive for the Kiwi and the following 8 week’s of dairy auction’s suggest that diary prices may have bottomed and are now trending higher. The GDT Price Index rose for four consecutive fortnights, with September 22 printing the largest increase in 5 years at 16.5%, and the October 6 release at 9.9%. These readings, coupled with USD weakness, have seen NZDUSD rally over 400 pips from recent lows.

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%. Another brush-stroke to bearish NZD picture was CPI for the second quarter which showed a mere 0.3% increase for the year ending June 30. This comes after a meagre 0.1% for the year ending March 30. On October 5, NZIER Business Confidence came in a -14, the lowest since April 2011. However the Kiwi soon found bids when GDT came in positive less than 24 hours later.

On the labour front, the unemployment rate increased to 5.9% in the June 2015 quarter, up from 5.8%. At the same time, there were 7,000 more people employed over the quarter, up 0.3%. Even though employment grew over the quarter, population growth was greater, which resulted in a lower overall employment rate. This was the eleventh consecutive quarter of employment growth, making it the second-longest period of growth since the period between 1992 and 1996.

New Zealand has seen strength in recent weeks and this may continue if the US data continues to disappoint, and commodities, namely dairy remain relatively supported. The next event for Kiwi is quarterly CPI on October 15. A deviation on this release should strongly influence whether the RBNZ cut rates at the monetary policy meeting a fortnight later.

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