RBNZ joins the doves

A busy 24 hours for markets, as the Reserve Bank of New Zealand became the last central bank to abruptly change course and deliver the dovish message we had expected in February, which we wrote about in this article  https://www.cityindex.com.au/market-analysis/rbnz-hear-the-coo-of-the-doves/.

While the Official Cash Rate was kept unchanged as expected at 1.75%, the RBNZ crucially changed its forward guidance, “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down”. The RBNZ went on to voice concerns over the weaker global economic outlook and reduced momentum in spending to explain the dovish shift in its policy outlook.

What makes the timing of the RBNZ’s dovish turn more surprising is the economic data in NZ over the last 6 weeks has mostly improved. The exception to this was last week’s Q4 GDP print which came in +0.6% verse the RBNZ’s own forecast of +0.8%. That said, most of the components of the GDP report were solid with inventories dragging the headline lower.

If the RBNZ were prepared to ignore the dovish tones of the Bank of Canada, Reserve Bank of Australia and Bank of England back in February, it could not ignore last week’s FOMC meeting where the Central Bank of the world’s largest economy took another large step down the dovish pathway.

Perhaps also forcing the RBNZ’s hand was the uncomfortably high level of the currency, as it threatened to break higher against both the U.S. and Aussie dollar. The RBNZ rate curve is now priced for about -40bps of cuts over the next 12 months, fractionally below the Australia rate curve (-48 bps of cuts) and on par with the U.S. rate curve (-40bps of cuts price). The high-flying NZ currency has now been grounded.

However, the question is whether yesterday’s fall in the NZ currency is temporary or of a more permanent nature and more importantly whether our Kiwi cousins should again put away the streamers, party hats and Kiwi dollars they have been eyeing and waiting to use on the day when AUDNZD finally breaks below 1.0000?

As we have highlighted in recent articles, downside momentum in AUDNZD has been slowing in recent weeks and the cross has never spent a prolonged period much below 1.0500. Long term valuations and rate differential charts suggest the cross should be trading closer to 1.1000/1.1200, however a rally of this magnitude would now require an improvement in sentiment towards both the Australian and global economy.

Shorter term, AUDNZD is now within sight of downtrend resistance at 1.0460 which comes from the 1.1175 high of August 2018. Should AUDNZD break and close above the trendline resistance, as well as recent highs 1.0490, it would open the way for this week’s recovery to extend towards the year to date highs at 1.0670/00, a move both worth waiting and trading for.

Source Tradingview. The figures stated are as of the 28^th of March 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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