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NZD/USD Fundamental Forecast – July 26, 2016

By:
Barry Norman

The NZD/USD dipped 19 points as the US dollar continued to rally and comments from RBNZ Governor Wheeler on housing prices. The kiwi is trading at 0.6980.

NZD/USD Fundamental Forecast – July 26, 2016

The NZD/USD dipped 19 points as the US dollar continued to rally and comments from RBNZ Governor Wheeler on housing prices. The kiwi is trading at 0.6980. the Reserve Bank yesterday spoke of a fragile world economy, a too-high New Zealand dollar, and short term inflation prospects that are way too low.

It signaled it would lower interest rates. Several economists including ASB’s Kim Mundy said they hoped this would bring down the value of the New Zealand dollar to put exporters in a better position.

The Reserve Bank is set to cut its cash rate next month to a record low and may deliver further cuts later in the year, to counter risks to economic growth, low inflation and a high dollar. The central bank this morning gave a clear signal of lower interest rates, which knocked the New Zealand dollar almost 1 percent lower.

“At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range,” Reserve Bank Governor Graeme Wheeler said in an unscheduled economic update.

It might not, however, help home buyers too much. “The announcement is likely to see the RBNZ cutting interest rates in August and we might see more interest rate cuts in the future,” Ms Mundy said.

Last week’s comments would bring down a New Zealand dollar that the Reserve Bank said was 6 percent higher than it thought it would be, and that would help exporters, she said. It would also help deal with short term inflation, which Westpac economist Satish Ranchhod said was not too high – at 0.4 percent annually.

“With inflation running at such low levels, the RBNZ is going to face a tough time,” he said. “As a result it is likely they are going to cut again in August and there is a risk that the OCR may need to go lower further out.”

Earlier this week, official data showed consumer prices rising 0.4 percent in the three months to June, with the annual rate at the same level. Inflation has been outside the RBNZ’s 1-3 percent band for nearly two years. The risks of low inflation have been overlooked after decades of worry about high inflation.

Ms Mundy said low inflation was a real danger. “When inflation is too low people can start to defer their spending,” she said.

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Upcoming Economic Events that you should be monitoring:

Tuesday, July 26, 2016

Country Name Volatility Previous
NZD Imports 2 4.22
NZD Exports 2 4.57
NZD Trade Balance (YoY) 2 -3.633
NZD Trade Balance (MoM) 2 358
GBP Inflation Report Hearings 3
USD S&P/Case-Shiller Home Price 2 5.4
USD Markit Services PMI 2 51.4
USD Markit PMI Composite 2 51.2
USD Consumer Confidence 2 98
USD New Home Sales Change (MoM) 2 -6
USD New Home Sales (MoM) 2 0.551

Government Bond Auctions

Date/Time Country Type

Jul 25 11:30 Germany Eur 1.5bn Jul 2017 Bubill

Jul 25 17:20 Italy Announces details of bond auction

Jul 26 11:10 Italy Holds zero-coupon/BTP€i auction

Jul 27 11:30 Germany Eur 1bn 2.5% Aug 2046 Bund

Jul 28 11:10 Italy Holds bond auction

 

 

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