• August MPS review was ultra-dovish. RBNZ delay rate hike for another year
  • Held OCR unchanged for a 22nd month in a row at 1.75%
  • Growth risk biased toward a cut

In June, we forecasted the NZDUSD cycle bottom to be placed either in June or July around 0.6650. That time, we assumed that RBNZ remains OCR at 1.75% through 2019.
While in August meeting the forward guidance was more dovish than expected; as a result, NZD tumbles nearly 2.00% across the board. The lower cycle is going longer than we expected.

Read the RBNZ Review.

Two reasons for NZD weakness: The Reserve Bank delay rate hike for another year, and downgraded the growth outlook are the key concerns for the investors to sell NZD.

First, the Reserve Bank revised GDP outlook in the near-term quarterly growth from 0.8% to 0.5%. In the statement, Orr said, “The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions.”. Also said, “The risks to the growth outlook are to the downside.”

Second, the rate hike is delay for another year to Q3 2020. Delaying rate hike should leave NZD unfavorable. The Reserve bank said “The direction of our next OCR move could be up or down” post the August review the risk of “rate cut” has been increasing.

On top of these, the US-China trade war has been pricing in NZD. The Reserve bank acknowledged the impact on announced tariffs to NZ activity is expected to be limited. However, highlighted the risk “An intensification of existing trade tensions is currently the biggest downside risk for global economic activity.” The Reserve Bank also noted “Around 20 percent of New Zealand’s exports go to China and around 10 percent go to the United States. There could be additional spillovers to New Zealand through other countries in Asia, which have close trading links with China.”

On the domestic data front:

  • New Zealand economy was expanded by 0.5%  in the Q1 2018, eased slightly after growth of 0.6% in the past two quarters. On an annual basis, the economy grew by 2.7%. Since Q1 2017 the economic momentum has been cooling, and we believe it is still not out of the wounds.

Read: March 2018 GDP rose 0.5% lower than the May RBNZ MPS forecast

  • In the June 2018 quarter, the unemployment rate rose to 4.5 percent (up 0.1 percentage points) and the underutilisation rate rose to 12.0 percent (up 0.1 percentage points).
  • The CPI rose 0.4 percent in the June 2018 quarter compared with the March 2018 quarter.

FX reaction: Horrible start to the second half

The Kiwi dollar plummeting against most trade currencies, with NZDUSD dropped to 0.6600 overnight and AUDNZD outperformed, reached a high at 1.1175 (our forecast is 1.1100).

The cross NZDUSD is finally ready to depreciate further to 0.6550 and 0.6500-0.6470 initially, and in case of intensification of existing trade tensions could cut deeper to 0.6250-0.6200 it’s 161.8fe. Resistances seem to be at 0.6680, 0.6760 and 0.6820. We presume that there is a limited scope for NZDUSD to rise.

Revise Forecast: We push our forecast to 0.6500-0.6460. Selling NZD into corrective rallies.

AUDNZD: The relentless NZD selling has pushed the cross AUDNZD to 1.1175, completed its 100.0fe or A-B-C structure target (1.0650-1.09918-1.08410). In the near-term, resistance seems to be at 1.1200 its 200EA. Turning to higher time frames (weekly) the A-B-C structure is pointing to 1.1400 levels. Noting that, earlier triple top placed between 1.1300-1.1330. On the monthly chart, 200MA seems to be at 1.1570.

Read: EURNZD forecast

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