• The Reserve Bank of New Zealand to leave policy steady at its September meeting.
  • Dovish forward guidance could weigh on Kiwi, but dollar mood to dominate
  • Eyes on hints about QE expansion or negative rates, as the economic situation improves.

With the coronavirus restrictions lifted for most of New Zealand (NZ), lower unemployment rate forecast and less-severe-than expected economic slump, the Reserve Bank of New Zealand (RBNZ) is expected to keep the Official Cash Rate (OCR) unchanged at a record low of 0.25% for the fourth straight month in September.

The Kiwi central bank expanded the Large-Scale Asset Purchase (LSAP) program to NZ$100 billion in August, insisting that “a package of additional monetary instruments must remain in active preparation.”

On Monday, the country re-opened after the strict restrictions re-imposed by NZ Prime Minister (PM) Jacinda Ardern to contain the coronavirus spread. However, Auckland will move to alert level 2 this Thursday. The South Pacific island nation has about 60 active virus cases, at the moment.

Ahead of the October 17 general election, New Zealand’s economy appears relatively stronger, having witnessed a shallower recession in the second quarter. The NZ Q2 GDP contracted a 12.2% QoQ versus -12.8% forecast.

Meanwhile, the Treasury Department’s pre-election Economic and Fiscal Update (PREFU) projected the unemployment rate to peak at 7.8%, down from a 9.8% forecast in the budget.

Dovish stance to persist despite strong fundamentals

The strong fundamentals could prompt the RBNZ to stand pat on its monetary policy settings on Wednesday but Governor Adrian Orr and company could reinforce the dovish stance amid looming concerns over the longer-term economic impact of the coronavirus pandemic.

The policy statement could reiterate the central bank’s willingness to adopt negative interest rates and even monetary financing of the government. However, the odds of the RBNZ deploying non-conventional policy measures remain lower, as the New Zealand Institute of Economic Research (NZIER) Monetary Policy Shadow Board continues to favor the expansion of the quantitative easing (QE) program than a negative OCR to stimulate the economy.

The minutes of the policy meeting could continue to show the board’s commitment towards supporting the economic recovery with all available policy tools. However, its take on the exchange rate value will be closely eyed after the Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle outlined currency intervention as one of the four policy options on Tuesday.

Any hints on the adoption of the negative interest rates as a policy option and/ or verbal intervention could exacerbate the pain in NZD/USD. The kiwi dropped nearly 120-pips to the lowest level in five-week near mid-0.66s on Monday, courtesy of the sell-off in risk assets and a surge in the US dollar demand, as a safe-haven. The dollar bulls were powered by the mounting risks over the coronavirus resurgence in Europe and the US Federal Reserve’s (Fed) reluctance to additional stimulus.

Therefore, the risk tone and the resultant sentiment around the US dollar could likely influence the NZD/USD reaction to the RBNZ's decision. Although the bias appears to the downside amid an expected dovish forward guidance.

More NZD/USD Price Analysis: Double top on the daily chart

 

 

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