The New Zealand dollar has pulled back over 250 pips against the US dollar in recent sessions, largely due to USD strength, a lower GDT price index and a dovish RBNZ statement on October 29. The Kiwi weakness comes after the currency spent several weeks rallying, gaining over 650 pips against both the Greenback and the Aussie since late September.
The Reserve Bank of New Zealand (RBNZ) kept rates on hold at 2.75% at the October 29 meeting, where there was an approximately 37% chance of a cut. Although the unchanged OCR was positive for the NZD, the accompanying statement was dovish and caused immediate downside in the currency. The RBNZ noted in the statement that additional easing measures are likely, which was the same as the prior statement, however they also added that continued appreciation of the NZD would require an even lower rate path. The RBNZ is notorious for jawboning their currency in an effort to drive it lower. The NZDUSD fell 50 pips immediately upon release. The addition of this sentence means that upside in the Kiwi should be capped heading into the December 9 meeting where there is an almost half chance of a 25 basis points cut to 2.5%.
CPI readings for Q3, although slightly beating economists’ expectations, showed a mere 0.4% increase in headline inflation since the previous year and an increase in Core of 0.8% for the same 12 month period; this certainly leaves the RBNZ with room to cut further. The increase in CPI for the third quarter was 0.3%.
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The GDT Price Index declined 3.1% at the latest auction on October 20, with the Milk Powder Price Index also falling 4.6%. This put an end to 8 weeks of gains in the dairy price and saw the NZDUSD drop over 100 pips on the day of release.
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%.
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%. Although 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.
The NZD still has the highest interest rate of all major currencies, which means the Kiwi can remain supported on risk appetite due to its higher yield. However, we remain bearish on the Kiwi leading into the December interest rate decision, as there is a good probability of a cut at that meeting. The RBNZ have stated that they remain data dependent; we will be looking out for important data over the coming weeks to inform us of the chances of another 25 basis point cut. Specifically we will be watching the fortnightly GDT price index, employment figures for Q3 due on November 3, retail sales on November 15, and inflation expectations on November 17.