NZD/USD bulls hope for uber dovish FOMC outcome

NZD/USD is currently trading at 0.6530 between a range of 0.6513 and 0.6539, flat on the day. The pair has drifted higher in the lead into the FOMC today, following positive trade news and data from overnight that showed that New Zealand’s net international liability position improved from Q4. The annual current account deficit narrowed from an upwardly revised $11.2bn in Q4 to $10.6bn in Q1 (or by 0.2%pts from 3.8% of GDP to 3.6%). However, while a lower NZD is likely to discourage import demand and encourage a little more export production, other headwinds (such as credit conditions, regulation, and uncertain global demand) cap the upside - Analysts at ANZ Bank explained. 

Short term relief from G20 sideline trade talks

Yesterday, it was confirmed by both sides that Trump and Xi will indeed meet at the G20 which is coming up around the corner this month. "The news on the talks in Osaka is a short term positive for asset markets, but we believe any talks will change little unless either side makes some meaningful concessions, which we do not view as likely at this time.  "

Looking ahead

The FOMC and New Zealand data are key. There are four scenarios for the Fed today:

1. If the Fed does not cut rates and only signals that a rate cut 'may be appropriate' later in the year while leaving the balance sheet policy as is, then that will be considered hawkish which would likely fuel a bid in the greenback and weigh on NZD/USD.  
2. If the Fed does not cut rates and does what the market expects, and signals a 25bps cut for the next meeting around, July, while leaving the balance sheet policy unchanged, then we are unlikely to see many fireworks as this is hardly as dovish as the market has been pricing in, and thus, can be considered as somewhat hawkish.  
3. If the Fed does not cut rates but signals that a 50bps cut is likely in the near term, as soon as July perhaps, and leaves the balance sheet  unchanged, then this is in line with market's pricing and would be considered dovish, confirming expectations and will weigh on the greenback and allow the bird some air time. 
4. If the Fed does not cut rates and signals a rate cut of 50bps  for the July meeting and more for the future and also announces that  the balance sheet runoff will stop tomorrow and thus opening up the possibility of more QE down the road - then you can't get more dovish than that and NZD/USD would be expected to fly off over the horizon into blue skies. 

As for New Zealnd Q1 GDP, this is set to be a strong one in GDP(E) terms, according to analysts at TD Securities: 

"Retail sales was +0.7% q/q, dwelling construction was +4.3% q/q and non-residential construction a blockbuster +9% q/q. There tends to seasonal weakness in public spending (we pencil in -0.3%pts) and we look for +0.4%pts for the trade sector. Overall, GDP is set to post at least 1% q/q with our (E) tracking literally twice that. Our GDP(P) measure is more modest at +1.1% q/q, although well above consensus +0.6%, which lifts annual growth from 2.3% to 2.9%."

NZD/USD levels