NZD Analysis – 31st of March

The NZD continues to have the highest interest rate of all major currencies, which means the Kiwi can remain supported on risk appetite due to its higher yield, however given expectations that the RBNZ are likely to cut rates even further in Q2, the currency remains with a bearish bias.

NZD Analysis

Interest Rate

Official Cash Rate: 2.25%

Last Change: March 10, 2016 (2.50%)

Expected Future Change: OIS Market Pricing 45% chance of a 25 bps cut

Next decision:  April 28

Inflation

Inflation Target: 2% (1-3%)

Period: 2015

CPI:  0.1%  Prior: 0.4%

Core:  0.5%  Prior: 0.8%

Next Release:  April 17

Employment

Period:  Q4

Employment Growth: 0.9%  Expected: 0.8%

Unemployment Rate: 5.3% Expected: 6.1%

Labour Cost Index: 0.4% Expected: 0.5%

Next Release:  May 3

Growth

Period:  Q4

GDP:  0.90% Expected: 0.70%

Next Release:  June 15

GDT Price Index: -2.9%

Next Release: April 5

Although the RBNZ have only recently cut the OCR to a new low of 2.25%, the market still expects further cuts by the end of Q2 2016. The Overnight Index Swap market is currently pricing in around a 50% chance that the RBNZ cut rates by a further 25 basis points at their next meeting on April 28.

At the March 10 meeting, the RBNZ surprised markets by cutting rates by 25 basis points to 2.25%. The tone of the accompanying statement was overall dovish, with the RBNZ stating that “further easing needed if signs perceived inflation shifting below 2%”, the RBNZ also indicated concerns regarding inflation expectations falling to a 22 year low, a further extension of low dairy prices, that the outlook for global growth has continued to deteriorate, and repeated that further declines in the exchange are appropriate. Housing in Auckland remains a financial stability risk, however the RBNZ have also noted that pressure on house prices outside of Auckland are also increasing. This is one factor limiting the Bank’s ability to continue reducing the OCR. However the reality of subdued inflation in New Zealand means further easing remains a likely possibility.

Gross Domestic Product for the final quarter of 2015 beat expectations at 0.9% q/q, above the expected 0.7% and in line with Q3 which also printed at 0.9%. GDP y/y also beat market expectations at 2.3% above expectations of 2.1% and once again in line with Q3 readings. Although GDP in New Zealand has been performing better than expected in recent quarters, continued declines in dairy prices are expected to weigh on consumption and investment growth for the next several years.

The latest dairy auction showed Global Dairy Trade price index declined by 2.9%, and that Whole Milk Powder declined by 0.8%. New Zealand’s dairy trade represents 7% of the economies GDP, therefore dairy prices are a significant factor of New Zealand’s economic growth and will remain highly influential in regards to whether the RBNZ decide to ease further or not.

Released February 3, employment for the fourth quarter beat expectations, with job growth moving up to 0.9% for the quarter, above estimates of 0.8% and, impressively, the unemployment rate dropping to 5.3% from the expected rise to 6.1%. This supplied the Kiwi with some much needed support and saw the pair rally nearly 250 pips during the subsequent two trading days.

The December quarter consumers’ price index increased 0.1% y/y, the lowest since 1999. Petrol prices made the largest downward contribution for the year. Excluding petrol, the CPI increased 0.5% y/y. The small movement for the year was also influenced by both lower vehicle relicensing fees and international air fares.