RBNZ Bucks The Trend
At a time when global central banks are increasingly guiding markets and signalling forthcoming moves, the RBNZ is increasingly become a difficult bank to anticipate. In August, the RBNZ caught traders off-guard when, against expectations of a near-certain 25 basis point rate cut, they lowered rates by a huge 50 basis points causing the New Zealand Dollar to spike lower. Traders were equally caught off guard at the RBNZ’s November meeting overnight when, against despite the market pricing a 75% chance of a 25 basis point cut, the RBNZ remained on hold. The New Zealand Dollar, this time spiked higher.
In the statement released alongside the policy decision, the RBNZ made the following key points:
- “Economic developments since the August statement do not warrant a change to the already stimulatory monetary setting at this time,” it said.
- Economic growth moved lower over mid-2019 as a result of lower business investment and soft household spending.
- Economic growth is forecasted to remain subdued over the remainder of the calendar year.
- Growth among trading-partners had also slowed.
- “Growth in global trade and manufacturing is weak and uncertainty remains high, dampening global business investment,” the RBNZ said.
- “However, New Zealand’s export commodity prices have been robust, underpinning a positive terms of trade”.
- The weaker New Zealand dollar exchange rate this year was also providing a “useful additional offset” to the subdued global economic environment.
- “Interest rates will need to remain at low levels for a prolonged period to ensure inflation reaches the mid-point of our target range and employment remains around its maximum sustainable level,”
- Employment remained near its maximum sustainable level while inflation remained below the 2 per cent target mid-point but within its target range.
- Despite remaining on hold here, further monetary stimulus would be added if needed.
In all, the meeting statement mainly dovish reflecting the decision to pause rate-cuts for the time-being rather than stop easing altogether. The market reaction which saw the New Zealand Dollar jumping higher, reflects the fact that most players were short going into the meeting rather than a change to the near-term outlook. With global conditions still soft, the RBNZ will be monitoring incoming data and should the current weakness persist of further weakness materialise, the RBNZ has said that it will ease further.
Obviously, a large part of this will be dependent on the outcoming of ongoing US-Sino trade negotiations. If the US and China sign a deal, this could take a great deal of pressure off the RBNZ, improving the global outlook and creating room for a recovery. On the other hand, if a deal is not signed this month and talks stumble on, investor confidence will be shaken once again, creating further downward pressure on global conditions which might see the RBNZ easing again this year.
Technical & Trade Views
NZDJPY (neutral, bullish above 70.52 )
From a technical and trading perspective. NZDJPY is continuing to trade above the monthly pivot at 68.68 though is still below the yearly S1 at 69.99. Longer-term VWAP has flipped positive here, suggesting the potential for a break higher in line with my NZDUSD view (see here). If price moves above the monthly R1 at 70.52, I will look to use this as a platform for further upside.
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