NZD likely to continue to edge lower towards 0.64 - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that the NZD is the best performing G10 currency on a 5 day view, largely on the back of this week’s better than expected print for Q3 CPI inflation.

Key Quotes

“Prices rose 1.9% y/y which was above the market consensus of 1.7% y/y and also above the indication presented by the RBNZ in its August 2018 Monetary Policy Statement.”

“The market will have to wait until the RBNZ’s regular policy meeting on November 7 for an official response to the firmer inflation data but, increasingly it has been questioning the RBNZ’s September statement that “the direction of our next OCR move could be up or down”.”

“In Q2 2018, the New Zealand economy grew 1.0% q/q, which was its fastest pace in two years. Already this data had weighed on expectations that the central bank could cut rates again this cycle.”

“Despite the strength of the New Zealand economy in Q2, the buoyancy of Q3 CPI inflation and the paring back of market expectations regarding the risk of a rate rise, there are still plenty of concerns for the RBNZ. Last week’s downward revision by the IMF of its world growth forecast and signs that the pace of activity in China is moderating are likely to worry policy setters.  Additionally, domestic business confidence indicators have been trending lower since the middle of last year while some measures of consumer confidence have also softened recently.”

“In our view the RBNZ is likely to retain a cautious outlook going forward.”

“In view of the fact that interest rate differentials are set to continue to move in favour of the USD in the coming months we see risk that USD/NZD will continue to edge lower towards 0.64 on a 6 month view.”