The RBNZ deliver another 50bp cut, AUD/NZD eyes breakout

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Summary of the RBNZ statement and minutes

• The RBNZ cut their cash rate by 50bp to 3.75%
• If economic conditions continue to evolve as projected, the committee has scope to lower the OCR further through 2025
• Economic outlook remains consistent with inflation remaining in the 1-3% target band over the medium term
• Economic activity in New Zealand remains subdued
• Price and wage setting adapting to low-inflation environment
• Lower import prices contributing to lower CPI
• NZ CPI expected to be volatile over the near term due to lower exchange rate and petrol prices
• The net effect of future changes in trade policy on inflation in New Zealand is currently unclear.

Their minutes say that trade restrictions are likely to weigh on domestic economic activity, and that there is already ore spare capacity in the economy than they had assumed in November. And while lower interest rates are expected to underpin domestic economic activity to a degree, the speed and timing of future cuts remains uncertain.

The RBNZ own cash rate projection has been lowered to a quarterly average of 3.45% by June, down from 3.83% in the November meeting. Which is a -38bp reduction compared with their November projection, or one and a half 25bp cuts.

Yet as there is no meeting in June, that only leaves April 28 and May 28 for them to spread these supposed 38bp of easing. And that begs the question as to whether we’ll see a 25bp in April and leave incoming data to decide whether to hold at 3.5% or go for another 25bp cut to 3.25% in April.

The RBNZ’s cash rate is now 35bp above the RBA’s, which is its widest in nearly 12 years. And this could be supportive for an eventual breakout on AUD/NZD, once the obligatory bull-trap which tends to plague forex markets plays out.

AUD/NZD technical analysis

The less-dovish-than expected RBA cut yesterday has positioned AUD/NZD bulls well for today’s dovish 50bp cut. Even if the RBNZ were also not as dovish as assumed. AUD/NZD trades pips away from its 2024 high, a level it seems more likely to break than note.

Currently up 0.94% over the past two days, it is enjoying its best 2-day run since August. But as always, I am suspicious of a clean first break, as rarely do prices break and continue higher in forex land.

The weekly chart shows that sharp reversals have occurred around similar levels twice before sine June. Regardless, widening interest rate differentials remain favourable for an eventual breakout on AUD/NZD and for 1.12 and 1.250. However, there does come a point where the New Zealand dollar becomes too weak for the RBNZ’s liking as it simply pushes import costs (and therefore inflation) too high.

For now, the bias remains bullish while prices remain above 1.10 and for an eventual break to see prices reach for 1.12, or even 1.1250 before a larger correction.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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