The surprising move from the Reserve Bank of New Zealand to maintain its Cash rate on hold to historical low 1% surprised across the board, forcing traders to cover short trades. Despite the strong rebound following the decision, kiwi gains should be limited as the RBNZ appears to base its decision on too optimistic fundaments while uncertainties over the completion and timing of a US – China phase-one trade deal is still questioned. There is therefore good reasons to consider that a deterioration of current economic conditions should force the RBNZ to cut rates by 2 February 2020 monetary policy meeting latest. In this context, we see potential for further NZD appreciation as scarce for the time being.
The reaction on financial markets is quite heterogeneous as EUR/NZD (1.7250) dropped at two-month low and the New Zealand Exchange 50 index closed at -0.83% while New Zealand sovereign bond yields rose at over 3-month high. Trump’s trade speech did not comfort market participants as the US President has not mentioned a date for a trade agreement with China and continues to be severely critical of the Fed's monetary policy as well as the EU’s trade policies described as “terrible, unfair barriers that are worse than China in many ways”. On the same line, the White House economic adviser Larry Kudlow confirms that no tariffs rollbacks are planned before any deal is signed with China, a bad news for investors, which were expecting the rollback to be part of the agreement. Considering the latter, we would rather suggest that the RBNZ policy adjustment should take place by early 2020. The RBNZ monetary policy statement appears too optimistic as it assesses that “risks to the economy in the near term are tilted to the downside”, although mixed signals from the labor, housing market and global economic conditions should weigh on the balance.
By Vincent Mivelaz