After four months in surplus territory we expect the trade balance to return to deficit in May. Driving this return to deficit, soft dairy prices likely continued to weigh on New Zealand exports last month while solid consumer indicators suggest imports remained a drag.
Of course the RBNZ has since surprised cutting the OCR by 0.25%. This should provide the Trade Balance with a welcome competitiveness cushion (ie, via the Terms of Trade) in the coming months but it will take some time to act.
Meanwhile, property prices and consumer demand remain strong arguing RNBZ policymakers will not want to cut further unless absolutely necessary. This is not the market view with expectations for another 0.25% cut still firm. We however are not so sure. Indeed while it is now clear the RBNZ could not wait for a Fed tightening, policymakers still expecting macro-prudential rules to do their job. Alongside an already significant 10.0% fall in the NZD TWI since April, the RBNZ will now likely ‘sit on its hands’.
Does this make NZD a buy? ‘Yes’ but selectively with our strongest preference being NZD/JPY.
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