New Zealand Dollar: Investors Wrong to Bet on Rate Cut, We're Biased to Get Long say RBC

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- NZD on back foot Friday but RBC say further losses to be limited.

- Market is wrong to price RBNZ rate cut, look to "get long" instead.

- Next week's GDP data key to RBNZ expectations and NZD outlook.

The New Zealand Dollar heads into the weekend having spent recent days hugging a three-year low but further losses will be limited, according to RBC Capital Markets strategists, who are looking for opportunities to "get long".

RBC comments on the Kiwi as fears of a Reserve Bank of New Zealand (RBNZ) interest rate cut are mounting, with deputy governor John McDermott having said in August that the odds of such a move have increased. Domestic lenders including Westpac and Kiwibank have already begun slashing their mortgage rates in recent weeks.

Accordingly pricing in interest rate derivatives markets, hich enable investors to protect themselves against changes in interest rates while providing insight into monetary policy, has shifted to suggest a near-50% probability the RBNZ will cut rates before 07 August, 2019. The implied cash rate for that point is just 1.64%, beneath the 1.75% record low.

"Even though we don’t agree with the way the market is priced, rationalising NZD/USD’s drop to a two year low is straightforward. From a starting point of a flat forward curve in early‐August, markets have (wrongly in our view) moved to price a significant risk of an RBNZ rate cut and this dynamic has carried the currency lower," says Adam Cole, chief FX strategist at RBC, in a note to clients.

RBNZ governor Adrian Orr said in August the next move in rates could be either up or down and that, in any case, rates may not rise from current levels until well into 2020. Until then, markets had been looking for a rate hike some time around the middle of 2019. This dealt another blow to the New Zealand Dollar.

New Zealand's Dollar has fallen 7.3% against the US Dollar and 7.8% against the Japanese Yen in 2018 while also notching up heavy losses against other currencies. It has declined nearly 5% against the Brexit-battered Pound Sterling.

"Because we think the risks to policy are more balanced than current pricing suggests, we have a bias toward NZD outperformance and look for tactical opportunities to get long," says RBC's Cole.

The NZD/USD rate was quoted 0.19% lower at 0.6559 Friday although the Pound-to-New-Zealand-Dollar rate was 0.07% lower at 1.9929.

Cole and the RBC team forecast the NZD/USD rate will rise to 0.67 in time for year-end, before climbing steadily to 0.70 over the course of 2019. They predict the Pound-to-New-Zealand-Dollar rate will decline sharply to 1.7910 in 2018 before recovering to 1.84 in 2019.

RBC's pushback against a bearish market also comes just days ahead of GDP data for the second-quarter, which is due for release at 23:45 London time on Wednesday 19 September.

Some analysts have said a poor second-quarter GDP number would be bad for the Kiwi currency but that it won't necessarily force the RBNZ into a cut right away. If a cut comes, it will likely be in December 2018 or after that point.

""If growth slows from here or does not materially pick up – Q2 GDP is released 20 September and our tracking is +0.7%/q compared to the RBNZ at +0.5%/q – then the market can be expected to mark higher the probability that the next move in the OCR is down," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities, in an August note.

As things stand, consensus is for the New Zealand economy to have grown at a rate of 0.8% during the second-quarter, which is up from 0.5% at the beginning of the year and ahead of the RBNZ forecast for a steady expansion of another 0.5% during the three months to the end of June. 

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