Yesterday, the New Zealand Dollar, NZDUSD, managed to end the London session up by near 0.5%, while the Euro, British Pound, and Canadian dollar were all lower vs. the US Dollar. Its Australasia sibling, the Australian Dollar was unchanged at the London close. The rise in the New Zealand Dollar, despite soft European PMIs, indicating that the Euro area is flirting with recession, appears to be investors booking profits in the currency pair ahead of the RBNZ rate meeting on Wednesday, September 25 at 03:00 BST.
Economists are not expecting a change in the official cash rate (OCR), however, I suspect some traders were keen on reducing their exposure head of the event, especially as NZDUSD bounced from a technical level support level.
The New Zealand Central bank cut rates by 50 bps in their August meeting to move ahead of the market instead of trying to catch up by cutting less but more frequently. For this week’s meeting, economists anticipate the rate to remain unchanged. Instead, large banks in New Zealand anticipate that the central bank might reduce rates in November by 25 basis points.
A weakening of private consumption and a drop in business confidence are cited as the reasons for the RBNZ cutting rates in November. The RBNZ also pointed out that wage growth had not risen materially despite the very low unemployment rate of 3.9%. New Zealand inflation is just below the 2% target of the bank and in the middle of the 1 to 3 percent band, but the annual New Zealand GDP increased by 2.1% in the second quarter, the lowest reading since 2013.
What is more interesting, is that the annual GDP growth is below the potential GDP growth as seen in the chart below, and this suggests that inflation will probably turn lower in the months ahead as the economy is not running at its full potential. The RBNZ should, therefore, remain in easing mode for longer. The Federal Reserve is also cutting interest rates but from higher levels, also as the Euro area is having negative interest rates, and UK is plagued by Brexit it appears that investors are preferring the USD, and this is also pressuring the NZDUSD pair.
Annual GDP Growth vs. Potential GDP
Source: Monetary Policy Statement August 2019.
NZDUSD Technical Outlook
Technically, the NZDUSD pair reached oversold level according to the RSI 14 indicator levels on September 20, please see the lower panel of the chart. The price also neared the lower blue trendline. The same trendline supported the pair at the start of September. The trend lines now suggest that NZDUSD might turn lower from around the median-line currently at 0.6380. The technical trend will remain downward as long as the price trades below the September high of 0.6454. It is important to remember that even if the price is oversold and the NZDUSD looks like it can drift higher, most professional investors will not buy the pair. Instead, they will wait for a healthy rebound in price so they can short-sell it.