NZD/USD: QE sentiment denting the Kiwi, but market way too ahead of itself

NZD/USD dropped a touch on the RBNZ headlines which have warned markets that the RBNZ  is looking to refresh the unconventional policy strategy. 

RBNZ says:

• Looking at refreshing unconventional policy strategy.
• Unconventional policy work 'at very early stage'.

The idea that the RBNZ could be moving towards QE has weighed on the bird in Asia today, as markets are looking for clues as to which of the central banks will be the first to the bottom. So far, the RBNZ has been the most forthcoming with its easing intentions. The RBNZ last cut its cash rate by 25 basis points in May, but at the last meeting around, where the RBNZ left its cash rate at 1.5 per cent in June, as widely expected, it did firmly signal that it may lower the cash rate in the future. 

"The RBNZ bought themselves some time with the 25 basis point cut in May, which wasn't priced and was delivered nine months earlier than the staff forecasts projected. The sand is rapidly running out of the hourglass now, however, as global policy rates are on the move,"  - said JPMorgan economist Ben Jarman.

Conventional wisdom says the Reserve Bank’s monetary policy committee will likely cut again in August when it will have had more information to justify another reduction. Indeed, the move toward lower rates globally, coupled with weak domestic economic data, makes a case for the RBNZ  to do so.  

5 unconventional monetary policy plans

Casting minds back to a bulletin issued all the way back on 4 May 2018, the RBNZ outlined 5 unconventional monetary policy plans the RBNZ could implement in case of a crisis. Including that the RBNZ is prepared to print money.  

The bulletin entitled “Aspects of implementing unconventional monetary policy in New Zealand” outlined these 5 potential tools:

1. Negative interest rates: the OCR could be cut to as low as -0.75%
2. Forward guidance: the RBNZ would clearly signal its intentions
3. QE: the RBNZ would consider buying large amounts of government and corporate bonds on the secondary market, and potentially foreign government bonds
4. Interest-rate swaps: the RBNZ could use this market to influence broader interest rates
5. Term lending facilities for banks: the RBNZ would lend to banks against collateral, guaranteeing them liquidity

“While there is no need to introduce unconventional monetary policies in New Zealand at this time, it is prudent to learn from other countries’ experiences and examine how such policies might work in New Zealand if the need arises,” - authors of the paper at the RBNZ said.

Back then, when the RBNZ Assistant Governor John McDermott was interviewed by Bloomberg following the release of the report (emphasis added is ours), he said, “This is all about planning for the future,” McDermott said. While there’s “no imminent prospect” of using such measures, “the probability of needing them at this point in the cycle is higher than it ever was in history” and “it would be silly of us not to be ready just in case.”

McDermott also commented on the likely need for government support if such a crisis arose:

“If we felt this was necessary to protect New Zealand, we can do any of this, but the more we’re supported by the government, the more effective this would be,” McDermott said. “Maybe the government would give us more capital or indemnify us against any risk of losses we’d take on, or maybe they would just do more fiscal policy. In that kind of world, I think coordination would be important.”

However, markets should not get too ahead of themselves. The recently released Q1 2019 GDP matched 0.6% forecast and the prior mark on a quarterly basis but grew past 2.4% expectations to print upwardly revised prior of 2.5%. While this remains below a 3% preferable growth rate, it is hardly making the case for negative rates any time soon. 

In 2018, the RBNZ stated that if annual GDP growth stays below 3% over 2019 and it’s 'clear growth' is not 'picking up' as expected, “the OCR would need to be reduced by around 100 basis points” by mid-2020. The OCR is now at 1.50%.  When the central bank made that statement, rates were at 1.75% which would mean, we are looking down the barrel of an OCR rate down to just 0.75% and it's not far to zero from there.  Indeed, the RBNZ is now a quarter of the way there already and it’s only mid-2019. If there were to be some catastrophic shock to the global financial system, its foreseeable to see the RBNZ cutting all the way down to 0.75% and into negative territory - but lower growth is hardly a need to worry about QE and such sentiment should be quickly pulled at this stage. ANZ responding quickly to the headlines: "The announcement shows that the N.Z. economy is no longer immune to unconventional policy." Again, this is not anything we didn't already know.  

NZD/USD levels

Instead, NZD/USD could firm-up again on the back of prospects of a dovish Federal Reserve and the possibility of a new easing cycle. However, stop territory is not far below from here and there are arguments for a 'one and done' scenario from the Fed, acting on just an insurance policy which could give some life back to the Dollar. This makes the case for a run of stops around 0.6700/20 before 0.6900 can come back onto the radar again compelling. We are some way off from the event on the 31st of July when the interest rate decision will be made which makes for plenty of time for a continuation to the downside and squeeze out of trailing longs below 0.67 the figure. 0.6680 marks the double top daily highs of 30th April and early June. On the flipside, 0.68 opens the way to the 0.69 handle.