FX traders will be thankful for calm in emerging markets on Tuesday after spectacular falls in recent days. While other trends continue unabated, most notably the rising US dollar and falling euro, Westpac are weighing in on the New Zealand dollar, suggesting that an RBNZ cut is now more likely than ever before.
The likelihood of the RBNZ’s next policy adjustment being a reduction in interest rates is at a new high, said Westpac on Tuesday. There is now a one-third chance, thinks the Australian bank, that the RBNZ’s Official Cash Rate will fall within the next 12 months – an eventuality that would see the already-embattled New Zealand dollar slump against its peers.
Westpac’s view on New Zealand economic matters has been reshaped by last week’s OCR review and monetary policy statement, as well as by a change in leadership at the RBNZ. Last week, the RBNZ announced it had pushed back its expectations for the first move in the OCR until September 2020, from September 2019 previously, inducing a sharp fall in the New Zealand dollar. The OCR was, of course, maintained at a record low of 1.75 percent, as it has been since being dropped to this level in November 2016.
Westpac’s base forecast is now for the OCR to remain unchanged until May 2020, at which point it will begin to rise slowly; however, as stated, the bank isn’t ruling out a reduction.
“The main reason for the change in the OCR call is what appears to be a change in the RBNZ’s behaviour since the new Governor took office,” writes Westpac’s chief economist Dominick Stephens.
“Communications have made it clear that the RBNZ is now actively considering OCR reductions and is less inclined towards hikes.”
Improving the outlook on interest rates might be the New Zealand dollar itself which, at a 2 ½-year low of 65.8 US cents, has lost 12 percent of its value since February – the kiwi is also staring at long-term lows versus the Canadian dollar, yen, euro and Swiss franc. Further depreciation will increase New Zealand’s export competitiveness and make a rate cut less likely.
Further to monetary policy factors, weighing on the New Zealand dollar at present is the emerging market crisis, which sees funds moved into safe havens; the US-China trade dispute, which threatens global trade; and falling dairy prices, although these stabilized at the latest fortnightly auction.
Westpac are forecasting NZD/USD at 0.67 at year-end and at 0.65 by the end of 2019, subject to its base scenario (OCR to rise after May 2020) remaining unchanged. Respective forecasts for AUD/NZD are at 1.1 and 1.08.
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