AUD/USD and NZD/USD Fundamental Daily Forecast – RBNZ Announcement: Is Rate Cut Still Possible?

The New Zealand Dollar is trading slightly higher after posting a volatile outside move earlier in the session. Volume and volatility is slowing late in the session ahead of the Reserve Bank of New Zealand’s interest rate decision, monetary policy statement and press conference.

At 1751 GMT, the NZD/USD is trading .6741, up 0.0009 or +0.13%.

The Kiwi is outperforming many of its counterparts as we near the close on Wednesday. We could be looking at position-squaring or aggressive counter-trend buying ahead of the RBNZ announcements. This suggests that investors may be a little reluctant to bet against the currency ahead of the events.

August’s interest rate statement and economic forecasts presents two-way risk for investors today given Reserve Bank of New Zealand Governor Adrian Orr’s comments in May. At that time, he said rates could move either up or down.

New Zealand inflation rose by 0.4% during the second quarter, down from the 0.5% seen in the previous quarter. But core inflation rose 1.7%. This number was in line with RBNZ forecasts although the core number took the market by surprise.

Forecast

Analysts and economists are unanimous in forecasting that the RBNZ will hold its interest rate steady at a record low of 1.75% in August, so the central bank’s assessment of recent economic developments and its latest forecasts will be what dictates the New Zealand Dollar’s response.

Look for the RBNZ to acknowledge the recent softening in activity by revising down its GDP growth forecasts publish in the accompanying Monetary Policy Statement and perhaps pushing back the timing of when it expects to raise interest rates.

The most recent set of forecasts by the RBNZ expects to raise interest rates some time in the third quarter of 2019 although some are looking for early to mid-2020.

The interest rate derivatives markets are implying a cash rate below the current 1.75% in each month until June 2019. A full rate hike, to 2%, is not fully priced until well into 2020. This suggests that traders feel a rate cut is more likely in the near future.

Others feel that talk of a rate cut is inappropriate at this time as wage and inflation pressure are finally increasing, even if growth is slowing. Additionally, borrowing costs are not an impediment for business so a rate hike may not be necessary.

Driving the price action in the NZD/USD after the announcement will be the RBNZ’s opinion on rate cuts. If it takes out the possibility of a rate cut then the New Zealand Dollar should rally. If the RBNZ is still considering a rate cut, given the economic data since May, then look for the Forex pair to weaken.