The NZD/USD was under pressure last week from a strong USD and the fall in milk prices to a six year low but the kiwi got a boost this week as Prime Minister John Key said that the NZD had fallen faster than expected. The currency pair was trading at 0.6524 on Friday and is trading around 0.66 after the PM comments. The forex market has been quiet compared to the past three weeks when Greek drama populated the headlines. FX volatility has been lower and verbal intervention can be magnified. The Reserve Bank of New Zealand (RBNZ) will announce its benchmark interest rate decision on Wednesday, July 22 at 5:00pm EDT.
The majority of economists in a Wall Street Journal poll expect the RBNZ to cut the cash rate by 25 basis points to 3.0 percent although there are some that are calling for a 50 basis points cut. Investors have priced in a rate cut and a dovish statement from Governor Graeme Wheeler. If any of those two doesn’t materialize the NZD could rally squeezing all the short positions.
The New Zealand central bank reduced the Official Cash Rate (OCR) by 25 basis points to 3.25 percent on its June 11, 2015 meeting. The global factors cited during Governor Wheeler’s statement haven’t changed all that much. Global growth remains sluggish, the U.S., China, Australia are mixed (and NZ biggest trading partners). The fall in export commodity prices continues unabated and with energy prices steady but with an Iranian nuclear deal in place further drops are forecasted. Mr. Wheeler called the NZD overvalued back in June when he called for a exchange rate adjustment to get the economy back on a sustainable growth path. Dairy is the largest export of New Zealand. It accounts for more than 29 percent of exports, which is why the price drop with no turnaround in sight lead to action from the central bank.
The RBNZ started a rate hiking cycle in the March of 2014 monetary policy meeting when the rate was 2.50 percent and added 100 basis points in four 25 basis points increments. If the central bank cuts rate agains in July it will be the second time in as many months and would be justified given the rapid deterioration of business and consumer sentiment as the global economy slows down and Kiwi exports lose their competitive edge. Given the pace of the tightening cycle, it is not out of the question that the RBNZ would not ease at the same pace. Regional banks are forecasting a 2.00 percent OCR by the end of the year.
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