New Zealand Dollar Tipped to Brush Off 50bp Rate Cut, says Analyst

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The New Zealand Dollar will likely brush off a sizeable 50 basis point interest rate cut from the RBNZ says an analyst we follow.

It's a big week ahead for the Kiwi as the Reserve Bank of New Zealand (RBNZ) looks set to cut by 50 basis points, representing a step-up in the urgency to address a stagnant economy.

Typically, such an acceleration in the rate cutting cycle would weigh on a currency, as it diminishes the attractiveness of New Zealand's assets to foreign investors that are on the hunt for higher returns.

"We think the disinflationary information that we have received will dominate and that this will, ultimately, encourage the RBNZ to accelerate the easing process," says Stephen Toplis, Head of Research at BNZ.

Although the NZD can initially come under some pressure, Jane Foley, Senior FX Strategist at Rabobank, thinks the currency can ultimately withstand the move.

"While an announcement of a 50-bps rate cut next week would likely still push the NZD lower, we would expect buyers to emerge on dips below the NZD/USD0.62 level," she says.

"In view of expectations that further rate cuts are on the cards from the Fed, the ECB and various other G10 central banks during Q4, the impact of RBNZ policy easing on the NZD crosses will likely be offset," she adds.

A 50bp rate cut from the RBNZ would come in the context of a similar-sized cut at the Federal Reserve in September.

The European Central Bank has meanwhile indicated it could step up the pace it cuts rates, while the Bank of England's Governor hinted Thursday that his central bank could follow suit.

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The context for NZD is therefore important: if others are stepping up the pace, the 50bp move at the RBNZ starts to look unremarkable.

This could leave NZD free to react to a prospective fiscal stimulus announcement from China, which could ultimately be the story of the week for markets.

"Chinese stimulus will boost regional demand for New Zealand exports," says Foley.

If anything, it would be global risks that can put the NZ Dollar under meaningful pressure in the near-term.

"A clear caveat to the recent better tone in both the AUD and the NZD is the outlook for the broader tone of risk appetite. Further escalation in Middle Eastern tensions would support the USD and undermine the AUD and NZD," says Foley.