NZD/USD Fundamental Analysis – week of September 5, 2016

The NZD/USD closed the week with a gain of 0.7% at 0.7291 and remains a strong buy ahead of the Reserve Bank of Australia’s interest rate decision and the pressure on the US dollar after the jobs report on Friday. The New Zealand dollar is also expected to fall against the US dollar, eventually to below 70 cents, as the Federal Reserve raises its interest rates.

In a speech Mr Wheeler said the challenges for central banks have stretched well beyond what was envisaged when policy frameworks and inflation targets were first set.  Flexible inflation targeting was the still the best way to conduct monetary policy in New Zealand, he said.

“This also remains the view of the 30 or so central banks that describe themselves as inflation targets, and includes most central banks in the advanced economies and several emerging market economies.”

He was not aware of any central bank that had moved away from an inflation-targeting framework since the global financial crisis.

The Reserve Bank will have to cut interest rates twice more to 1.5 percent to nudge inflation back into its target band in a strongly growing economy, according to the Institute of Economic Research (NZIER).

The think tank’s latest quarterly economic predictions are forecasting growth of around 3 percent over the next couple of years, driven by construction and tourism, while the relatively high New Zealand dollar will help to keep a lid on inflation.

“We do not expect annual inflation to edge back into the Reserve Bank’s 1-3 percent inflation target band until the first half of next year,” said NZIER senior economist Christina Leung.

She said this would prompt the Reserve Bank to keep cutting interest rates. “We expect a rate cut in November, and beyond that, despite some uncertainty about how quickly they will do it, we think another one by the middle of next year.”

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This Week’s Economic Events That You Should Be Monitoring:

 Government Bond Auctions

Date Time       Country           Auction

Sep 06 11:00 Austria Holds bond auction

Sep 06 11:30 UK 1.5% 2026 Gilt

Sep 06 11:30 Germany Holds I/L bond auction

Sep 07 10:30 Denmark Holds bond auction

Sep 07 11:03 Sweden Holds bond auction

Sep 07 11:30 Germany Eur 5bn 0% Aug 2026 Bund

Sep 08 11:00 Ireland Holds bond auction

Sep 08 17:20 Italy Announces details of bond auction