Another rate cut from RBNZ? - Rabobank

Jane Foley, a senior FX strategist at Rabobank, thinks that the relatively low levels of liquidity in the NZD can on occasion make movements in the currency difficult to interpret and the overnight gains have been attributed to news of a robust export performance for New Zealand. 

• “Exports to China have been strong in recent months led by sales of milk powder, beef food preparations and logs.  This is a significant relief given widespread concerns amongst China’s trading partners about the ripple effect caused by slowing growth in the world’s second-largest economy.  That said, not all recent New Zealand economic data have been as encouraging.  On the back of that the market is mostly priced for another RBNZ rate cut in August and is placing around a 20% chance of a move tomorrow.
• Q1 GDP registered growth of 0.6% q/q.  While this was in line with market forecasts, it was moderately better than the 0.4% q/q outcome predicted by the Bank.
• All of the respondents in the Bloomberg survey expect the RBNZ to leave rates unchanged at tomorrow’s meeting. This would allow policymakers the opportunity of examining another 6 weeks of fresh economic data in addition to a revised set of internal forecasts ahead of the next policy meeting in August.  Even so, a rate cut tomorrow would unlikely be a complete surprise and it would offer the RBNZ an opportunity to leverage on the element of surprise.
• The movement in the NZD since May has most likely disappointed policymakers.  A softer NZD would clearly help support exports in addition to helping the RBNZ support price pressures.
• Since the RBNZ kicked off its easing cycle, other central banks have indicated they will be following suit.
• The easing bias of most G10 central banks will have introduced a currency wars theme into central bank thinking and some commentators see this as a reason for the RBNZ to announce a ‘surprise’ rate cut at tomorrow’s policy meeting.  While the NZD could find support on the announcement of steady policy tomorrow, we expect such a move to be limited by dovish rhetoric from the central bank. We remain bearish on the outlook for NZD/USD and look for a move towards 0.63 on a 12-month view.”