NZD Update – Forex Trading Tips

There is no opening trade call today as we await tier one data from UK and US. I prepared the NZD update in order to keep you up-to-date with the latest changes in the market.

Fundamental Bias: Bearish

Interest Rate

Official Cash Rate: 3.25%

Last Change: June 11, 2015 (3.50%)

Expected Future Change: Decrease (H2, 2015)

Next release: July 22

Inflation

Inflation Target: 2% (1-3%)

Period: April 1, 2014 – March 31, 2015

CPI: 0.1%

Core: 1.0%

Next Release: July 14

Annual CPI (orange = actual, blue = estimate)

Employment

Period: Q1

Employment Growth: 0.7% Expected: 0.8%

Unemployment Rate: 5.8% Expected: 5.5%

Labour Cost Index: 0.3% Expected: 0.4%

Next Release: August 4

Reserve Bank of New Zealand

• Rate Statement (released June 11)

• June Statement on Monetary Policy (released June 11): RBNZ – SOMP – June

• The Governor of the RBNZ is Graeme Wheeler, incumbent since September 2012.

• The aim of the RBNZ is to maintain price stability – measured by CPI – and promote the maintenance of a sound and efficient financial system.

• The Reserve Bank uses monetary policy to maintain price stability as defined in the Policy Targets Agreement (PTA). The current PTA requires the Bank to keep inflation between 1 and 3 percent on average over the medium term, with a focus on keeping future average inflation near the 2 percent target midpoint. The Bank implements monetary policy by setting the Official Cash Rate (OCR), which is reviewed eight times a year.

Summary

• Numerical economic data from New Zealand is compiled and released by Statistics New Zealand.

• Statistics New Zealand measure employment change in percentage terms rather than absolute change as in most countries.

• New Zealand accounts for approximately 35% of the world trade in dairy products. Dairy is by far the country’s biggest export, accounting for 7% of GDP.

• On April 20, CPI showed that inflation fell 0.3% in the first quarter of 2015. This followed a 0.2% drop in Q4 2014. CPI had not dropped in two consecutive quarters since 1999. Core CPI for the annual period ending the March quarter was at 1% – one tick lower and inflation is below the Bank’s target range.

• On April 22 RBNZ Assistant Governor John McDermott remarked in a speech that the outlook for inflation was subdued and that monetary policy should remain stimulatory for a prolonged period. He further stated that “Evidence of weakening demand and domestic inflationary pressures would prompt us to consider lowering interest rates.” This sent a strong signal to markets about the bank’s likely intention to lower rates.

• Since McDermott’s remarks, the latest jobs report showed all three components coming in worse than expected.

• Global Dairy Trade price index has been in a downtrend for 12 weeks, showing 6 consecutive negative readings.

• On June 11 the RBNZ reduced the official cash rate by 25 basis points from 3.50% to 3.25%. The country still has the highest interest rate of all eight major currencies.

Analysis

The RBNZ’s interest rate cut on June 11 was rather predictable given the following factors: the Bank’s commentary which hinted at further easing, the fall in milk product prices, the implementation of macro-prudential controls for the housing market and, most importantly, the CPI readings released April 20. These readings showed total inflation for the year ending the March quarter at 0.1%. This is well below the Bank’s target range of 1-3%. Core inflation was at 1%, which shows that even after adjusting for the drop in oil prices, inflation in the country is at the lower bound of the Bank’s acceptable limit. That is primarily why the RBNZ had no choice but to cut at the June meeting.

NZD depreciated substantially against all counterparts upon the rate decision, falling 235 pips against the USD on the day and 1,000 against the GBP in the following 3 days.

The June Policy Assessment, commonly referred to as a rate statement, said that the economy is growing at around 3% but the weaker prospects for dairy prices weakens demand growth and may slow any rise in inflation. The statement was dovish stating that: : “A reduction in the OCR is appropriate given low inflationary pressures and the expected weakening in demand, and to ensure that medium term inflation converges towards the middle of the target range. We expect further easing may be appropriate. This will depend on the emerging data.”

Many banks, including Westpac and Deutsche, are calling for another 25 basis cut in coming months, even as early as the next meeting on July 22.

Given the recent rate statement’s comments about dairy prices, it is now especially important to monitor the GDT Price Index. The last six releases (12 weeks) have come in negative. This downward trend is an indicator for the growth and inflation outlook in New Zealand. The next release is Tuesday, June 16; there is no estimate, the prior was -4.3%.

New Zealand 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 bearish on the NZD and view any pullbacks as selling opportunities.

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