RBNZ Could Still Cut Rates - UBS

RBNZ Could Still Cut Rates - UBS

9 June 2016, 19:12
Roberto Jacobs
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RBNZ Could Still Cut Rates - UBS

The Reserve Bank of New Zealand (RBNZ) kept interest rates on hold at 2.25% at the June Monetary Policy meeting.  While money markets gave little chance of a cut today, clearly the forex market expected more, as the NZD jumped more than 1% against the USD and was also stronger against the AUD, said the UBS team. They still expect a rate cut of 25 bps at  Augus meeting.

Key Quotes

Fed Chair Janet Yellen's speech and the terrible US non-farm payrolls data has reinvigorated interest rate carry trades and decisions like the RBNZ has taken prolong these.”

“Kiwi dollar strength and weak commodity prices remain the RBNZ's major concerns, repeating a previous statement that the "exchange rate is higher than appropriate given NZ’s low export commodity prices." In the accompanying June Monetary Policy Statement (MPS), the RBNZ cites the widening interest rate differentials as contributors to the strength of the NZD trade-weighted index. At the same time, comments by RBNZ Governor Graeme Wheeler at a parliamentary select committee reiterated the RBNZ's frustration with currency strength, despite 125bps of cuts in the cash rate. A heated-up housing market constrains further easing. The RBNZ recently expressed concern on the topic and the risks to broader financial stability, which indicates more regulatory policy action is likely ahead to address housing.”

Forward guidance indicates another cut is likely; we foresee this at the August policy meeting, when we're penciling in a 25bps cut. We remain bearish on the NZD, though the upcoming 1Q16 GDP release on 16 June complicates matters somewhat in the short term. New Zealand GDP is likely to beat the RBNZ's forecast of 0.6% for the quarter, which could boost the currency on the day. We stick to our three-month forecast of NZDUSD at 0.66 and 0.63 over 12 months.


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