RBNA have repeatedly mentioned the expectation and need for a lower Kiwi Dollar and Cash Rate, so with the Kiwi Dollar having risen over the past few weeks, many pundits are calling for a rate cut tomorrow to send NZD lower. However if you look at the chart above you'll see we are trading marginally lower than the previous statement, albeit only very slightly, so a rate cut on this basis is not a done deal. Of course RBNZ could be referring to cutting rates if current exchange rate is sustained, as opposed to a rising trend being sustained (which is how I read it) but we also have to consider data which has come out since the October statement.
Potential reasons to keep rates on hold
- Previous cuts have still not worked their way fully into the system yet.
- Business confidence has increased for two consecutive reads after turning negative in June, suggesting the conditions and current rates are doing their job (and may continue to do so).
- Unemployment remains steady at 6%.
- Business PMI (above) shows continued expansion. Whilst it expands at a slower rate it remains at elevated levels between 52.4 (employment) and 55.9 (new orders). Only finished stocks turned contracted at the last read but new orders more than makes up for this in my books.
- Quarterly manufacturing sales highest since March '14 at 4.2%.
- FED are highly expected to raise rates on 16th December, so may be prudent to see market reaction before cutting further.
- Inflation is expected to return to the 1-3% band early 2016 as the effect of lower oil prices are removed from the calculation
Potential reasons to cut rates
- RBNZ may want to get ahead of the curve and bring NZD with a rate cut and further aggressive jawboning
- Recent data from China shows imports continue to decline aggressively and inflation (out latter today) also within decline.
- RBNZ still not happy with current exchange rate
- Non-tradable remain negative, and a lower rate should help this return positive over the coming months.
- Global growth and commodity prices continue to decline. Whilst dairy prices bounced marginally higher, it has seen multiple declines in recent months which does weigh on the economy in future.
NZDUSD: I will perform more detail technical analysis tomorrow, closer to the actual event. However two areas of interest for me are the 0.679 high, as this respected a cluster of resistance with an aggressive spike. This level may prove a difficult one to crack (even if RBNZ hold rates) so profit objectives would stand a better chance below this key level. The 0.66 zone also presents several levels of potetial support. However we could taje a break below the bullish trendline (and monthly pivot) as a bearish signal for a move down towards 0.65 but I would want to see it trading below 0.6427 swing low before becomming more confident the dominant bearish trend has resumed. Something to be aware of is large speculators are equally divided over the Kiwi's next move as the long/short ratio is only fractionally long.
NZDCHF: I had proposed a bullish scenario for NZDCHF earlier this week but, as you can see, it has already broken out of the bullish channel (to the downside). This is not to say it won't pop higher if RBNZ hold rates but technically it now looks less appealing, especially as we are now below the 200MA and only just managing to find support at the 50MA.
New Zealand OCR in focus
The pending decision by RBNZ is going to be a close call but upon weighing up all of the data my bias is for rates to remain on hold, obligatory dovish statement and potential for jawboning in the press conference.