NZD/USD's wings are clipped leading into the RBNZ and coronavirus concerns

NZD/USD is under pressure on MPS week with the Reserve Bank of New Zealand most probably on hold, potentially unable to portray a more hawkish stance as they might have been able to, pertaining to the coronavirus threat. NZD/USD is currently trading at 0.6386 having travelled between a high of 0.6417 and a low of 0.6381.

Despite the recent run of solid economic data of late, the RBNZ will have to take into consideration the known and unknown economic impacts of China’s novel coronavirus outbreak. For that matter, analysts have been trimming first-half growth forecasts and it will be no surprise that the RBNZ does the same and also trim their OCR outlook, where otherwise, they may have been more on the hawkish side if it were not for the coronavirus. Analysts at ANZ Bank lowered projections for NZ Gross Domestic Growth to 0.8% for the first half of 2020 from 1.3%.

Westpac Ready Reckoner & RBNZ preview

As a gauge of the economic outlook, we can look to the Westpac Ready Reckoner which quantifies how the recent data could impact the RBNZ's Official Cash Rate forecasts. (The Ready Reckoner is meant to be a pure read on how the balance of recent data will affect the RBNZ's models, not a prediction of the RBNZ’s actions).

Key notes of the Ready Reckoner:

• GDP: +15bp: This is mainly due to the large upward revision to 2018 GDP growth. September 2019 GDP growth was 0.7%, compared to the RBNZ's forecast of 0.3%. However, June quarter growth was revised down from 0.5% to 0.1%. 
• Inflation: 0bp: Although December quarter inflation was higher than the RBNZ's forecast, this was almost entirely due to transitory factors that will unwind.
• Exchange rate: -10bp: Before coronavirus starting affecting markets, the TWI was around 2% higher than the RBNZ's previous forecast. 
• Unemployment: +5bp: December quarter unemployment was 4.0%, compared to the RBNZ's forecast of 4.2%. Employment growth was actually lower than the RBNZ's forecast. Nevertheless, the labour market is clearly tighter than the RBNZ expected. The underemployment rate fell to a new post-GFC low, and wage growth was stronger than the RBNZ anticipated.

For a full preview of the RBNZ, see here: RBNZ Preview: Coronavirus should limit upside potential for NZD/USD

US dollar in focus, heading to 99.00 DXY? 

On the US dollar side of the equation, we await Federal Reserve's Jerome Powell's testimony as to the next risk event as well as key data such as Consumer Price Index and Retail Sales. The US dollar has been the best performing currency on recent data events coupled with the persistent concerns over the coronavirus, sending risk flows into the safe-haven currency.

Should there be a solid outcome in the data this week with an element of optimism from Powell, then the 99 handle in the DXY will be home calling for the bulls who were breaking through the end of Jan's trendline resistance, 98.20, earlier this month. However, if Powell delivers a dovish tone, similar to in the January 29 press briefing, we could see some rest bite in the greenback's advance. It is worth noting that the Net Long USD positions edged higher in a week ending February 4th.

NZD/USD levels