New Zealand Dollar Struggles as RBNZ Decision Looms Large

The NZ dollar exchange rate complex strengthened at the start of the second week of June only for selling pressure to resume on Tuesday the 9th.

"Don’t get us wrong. We can see a case forming for some policy easing – but for later on, not right now.” - Craig Ebert at BNZ.

The move higher in the NZD offered a brief respite for those looking to transfer funds out of the currency which is no longer the out-performer on the global currency markets as it had been in recent years. Those looking to sell kiwi dollars are having to get used to declining purchasing power.

The move lower has been in place for much of 2015 owing to an apparent slowing down in economic growth leading to growing speculation that the Reserve Bank of New Zealand (RBNZ) may cut interest rates this year.

We have suggested before that such a move would be an all-out negative for the NZD’s outlook and remains the key downside risk for the currency through the remainder of the year. Indeed, there appears to be a 50/50 split amongst analysts as to whether the RBNZ will cut rates on Thursday.

Nevertheless, there are gains being witnessed for the kiwi at the time of writing, those with financing needs could do well to take advantage of such spikes:

• The pound to New Zealand dollar exchange rate (GBPNZD) is higher by 0.26 pct at 2.1544. We have recently written regarding forecasts for the GBPNZD to rally higher to 2.40.
• The euro to New Zealand dollar exchange rate (EURNZD) is 0.63 pct higher on a day-on-day comparison at 1.5909.
• The New Zealand to US dollar exchange rate (NZDUSD) is 0.69 pct lower at 0.7095.
• The Australian to New Zealand dollar exchange rate (AUDNZD) is marginally higher at 1.0783.

Be aware that quotes here represent the wholesale market. International payments attract a discretionary spread which ensures the rate offered by your bank can limit your purchasing power. An independent FX provider can however get closer to the market, in some instances delivering up to 5% more FX, learn more.

Could the NZD Rally on Thursday?

Despite the rally seen at the start of the new week for the NZ dollar the outlook promises to be volatile with an overall weakening bias preferred.

“The potential for the RBNZ to start cutting rates on Thursday continues to weigh on the Kiwi. It seems as each day goes by someone publishes more dire facts about the Dairy industry which increasingly looks to have massively over invested in itself. The solution will be found in either a rebound in Dairy prices, a lower currency or a retrenchment in Dairy capacity. There are signs that the latter is occurring with a large increase in cattle being sent to the meat works to reduce the strain on some farms,” says a note to clients issued by currency brokers Tuatara in Auckland.

That said, if the RBNZ decides to maintain policy settings as they currently stand there could be the opportunity for gains. We believe markets would likely cut exposure to the NZD heading into the meeting as they adopt a cautious approach.

A covering of this negative positioning following a ‘no change’ decision could see a recovery shape up as exposure is balanced.

Indeed, analysts at BNZ Bank are forecasting no change:

“For Thursday’s Monetary Policy Statement, we still believe the weight of evidence, and argument, is for the Reserve Bank to sit and wait. Don’t get us wrong. We can see a case forming for some policy easing – but for later on, not right now.”

In May we reported that BNZ see no rate cut in 2015, it would therefore appear that this bank is slowly starting to price in a cut.

According to BNZ’s Craig Ebert the preconditions for easing that the Bank made (unusually) clear at its April meeting – weakening demand and wage and price-setting outcomes settling at levels inconsistent with the inflation target – are far from being met

Be aware that the RBNZ could try to talk the exchange rate down as they have done with varying degrees of success in the past. Either way, any words directed at the NZ dollar invariably bring about volatility that those with payment requirements could get hurt by.

Policy makers will certainly be happy with the recent declines we have seen in NZD over the course of 2015 and they may wish to ensure this downward momentum is maintained.

“What can be taken as a given is that the Reserve Bank will leave no doubt that it sees the exchange rate as still too high,” confirms Ebert.

So while a ‘no change’ policy outcome may prove to be a pro for the NZD, any aggressive talk of a high exchange rate may undermine the currency and we could see the trend lower re-assert itself.