NZD/USD: Under pressure ahead of RBNZ rate decision

While following downbeat inflation expectations of the New Zealand central bank, not to forget pessimism surrounding the US-China trade deal, the NZD/USD pair stays on the back foot after being the biggest G10 loser the previous day. The quote currently takes the rounds to 0.6330 at the start of Wednesday’s Asian session.

The Reserve Bank of New Zealand’s (RBNZ) Inflation Expectations, 1.8% versus 1.86% prior for the two-year, propelled calls for the kiwi central bank’s rate cut worth of 25 basis points (bps) to the official cash rate (OCR). Westpac was the first to change the sides while expecting a rate cut after staying away from it recently. “The RBNZ Survey of Expectations has revealed a further decline in inflation expectations. This alters the balance of available information ahead of tomorrow's OCR decision. Accordingly, we are reverting to forecasting an OCR cut tomorrow (previously on hold),” the bank said.

Also adding to the pair’s weakness is the US Dollar’s (USD) broad recovery following a partial market close on Monday and a downbeat sentiment concerning the trade deal between the United States (US) and China.

In their latest public appearance, the US President Donald Trump signalled a substantial increase in tariffs on Chinese goods on the failure to reach a deal while the White House Economic Adviser Larry Kudlow refrained from giving any timeline to the deal. Both the diplomats criticized the US Federal Reserve (Fed) for its easy money policy.

On the data front, recently released October month Food Price Index (FPI) from New Zealand, -0.3% versus 0.0% prior, seem to be another negative for the kiwi traders.

Looking forward, all eyes will be on the RBNZ’s rate decision and Governor Adrian Orr’s press conference afterwards. Even if markets do expect a 0.25% OCR cut, the RBNZ is famous for surprise. Ahead of the release, the Australia and New Zealand Banking Group (ANZ) says, “We expect the RBNZ will cut the OCR to 0.75% at 2 pm today, and leave the door ajar to further cuts while stopping short of overtly signalling them. Markets had become less certain of a November rate cut in recent weeks, with the market-implied probability of a 25bp rate cut dropping to a low of 50%, before bouncing to 75% currently. To be fair, it hasn’t all been one-way traffic since the August MPS, with the NZD down and house prices picking up. But we think a downgrade to the RBNZ’s near-term growth forecasts will be the overriding catalyst. In addition, global growth has disappointed and domestic credit conditions have tightened. Perhaps most concerning, the RBNZ’s survey yesterday showed a further drop in inflation expectations, with the two-year-ahead measure down to 1.80%, from 1.86% in Q3. Low inflation expectations dampen price- and wage-setting, highlighting the risk that inflation will continue to fall short of 2%.”

Technical Analysis

Although 0.6320 and 0.6300 are holding the keys to pair’s declines to October 16 low of 0.6240, buyers will look for entry only if the pair manages to cross 50-day Exponential Moving Average (EMA) level of 0.6370.