RBA to join the dove list following RBNZ, BoC

Forex News and Events

The RBNZ kept its official cash rate unchanged at 3.50% as expected, while delivering more-dovish-than-expected accompanying statement. Policymakers signaled that RBNZ rates will remain on hold longer “in the current circumstances”. Major explanatory factors in RBNZ’s dovish shift are the lower oil and commodity prices and the cool-off in inflationary pressures as elsewhere in the world. The New Zealand’s CPI decelerated by 0.2% in Q4, pulling the year-on-year inflation down from 1.0% to 0.8%. In the current circumstances indeed, there was little enthusiasm to maintain the hawkish tone. Despite the recent sell-off, the NZD is still considered unjustifiably high. There is no need to revive carry inflows to push the kiwi higher verse its negative-rate peers (EUR, CHF). Moreover, the weak dairy auctions, subdued volumes and expensive Kiwi all together brought the 12-month trade deficit to NZD -1.150 million, higher deficit in more than a year. The Kiwi needs to depreciate further to improve its trade terms and to boost growth. As a result, the RBNZ decision to pause its tightening cycle is easily welcomed. The stagnation is unlikely to resume until at least December 2015. On a final note, Wheeler said “future interest-rate adjustments, either up or down, will depend on the emerging flow of economic data” signaling that a rate cut remains a remote possibility. However, we believe it should only be used if the TWI NZD rises to unbearable levels.

We expect the extension of the period of NZD underperformance verse USD and GBP, while the sentiment verse EUR, CAD remains balanced. NZD/CAD hits 200-dma (0.9128) for the first time since August. A break below the 200-dma should open way toward 0.8950/0.9000 (end-December / January support). Yet the persistent slide in oil prices keep the CAD-bulls equally skeptical on the other leg.

USD/CAD clears resistance at 1.2500 psychological level as the WTI crude tests $44 as the front-end of the futures curve shifts lower and steepens from a week ago. As the bullish trend gains momentum, we see reinforced support at 1.2205 (Fibonacci 76.4% level on 2009-2011 sell-off). The key mid-run technical resistance stands at 1.2734 (2005 high), then 1.3065 (2009 high). Canada releases November GDP data on Friday. If the soft expectations are met, USD/CAD should push it higher despite overbought conditions (RSI at 80% & 30-day upper Bollinger Band at 1.2560).

AUD/NZD is expected to face decent offers at 1.0884/85 (Fibonacci 38.2% on July-November 2014 hike / 200-dma) as soaring speculations on a potential RBA cut keep the AUD-bulls aside before the weekly closing bell. The 3-month cross currency basis displays stagnation in AUD preference verse NZD over the past quarter. The focus is fully on the RBA’s “prudent course is likely to be a period of stability in interest rates” rhetoric. Any modification / drop on the key phrase will confirm shift from neutral to dovish RBA statement and increase speculations of a rate cut as soon as next month (if no concrete action is taken next week). AUD/USD trades at 0.7800/0.7907 range. Solid offers trail below 80 cents.

AUD preference stagnates verse NZD