By: Jarratt Davis
The RBNZ made their second interest rate cut for 2015 on July 23, decreasing the official cash rate to 3%. The market was heavily short leading into the decision; the Kiwi dollar had depreciated 1,250 pips against the greenback during the prior 12 weeks. The Overnight Index Swap market was pricing a 100% probability of at least a 25 basis point cut and an 8% chance of a 50 basis point cut. Due to the rate cut having been already priced in, the announcement of a 25 basis point cut did not cause any further downside in the currency, but rather a relief rally due to the cut not being as large as some were anticipating. Although the accompanying statement clearly stated that further easing would be required, the removal of the reference that the NZD is unjustifiably high further added to the currency's buoyancy. Despite this relief rally seen in the 'flightless bird', several major investment banks are expecting several more interest rate cuts this year, which could see the benchmark rate around 2.5% by year end.
Fundamental Data
Gross domestic product for the first quarter missed expectations by 0.4% and showed growth of only 0.2% for the first three months of 2015. The Global Dairy Trade Price Index has declined for 18 consecutive weeks and the most recent reading, on July 15, printed at -10.7%. Another brush-stroke to bearish NZD picture was CPI for the second quarter which showed a mere 0.3% increase for the year ending June 30. This comes after a meagre 0.1% for the year ending March 30. The jobs arena has also been poor with all three employment metrics - job growth, jobless rate and wage inflation - missing expectations for the first quarter, released May 6. Across these four key data points we see the description of a weakening economy, largely induced by depreciating commodity prices - namely dairy. However softening mineral prices also negatively impacts the New Zealand economy. This poor run of data prompted the Bank to cut again on July 23 and maintain a dovish bias.
Outlook
New Zealand still has the highest interest rate of all major currencies, as such there is a lot of room downward to close the gap with other economies if the data calls for it. We remain bearish on the NZD in the medium term, although the post-rate cut rally may persist for several sessions as a heavily short market rebalances.
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