Whether or not this even materialises right now is irrelevant, as markets are pricing in a rate cut by RBNZ right now (for next week). In the current risk-off environment this has made shorting NZDJPY particularly useful for short positions as this is a classic risk-of trade; Sell high-yielding currencies such as NZD against low yielding currencies such as JPY or CHF.
As we entered the festive break RBNZ suggested that 2.5% would be the floor on rates for now. However they also cited their expectations for CPI data to move within the 1-3% band targeted by the Central Bank. Combine the fact that inflation is now negative and global growth also points down, then a rate cut from the highest yielding G10 economy is a probably scenario.
"Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data."
Since the above statement was released we have seen global stocks tumble, China and US print poor growth figures, oil drop below $30 per barrel and IMF lower yet another global growth forecast.
Out of the major Central Banks I have to tip my hat to RBNZ as they tend not to sit on their hands and 'see how it goes' so there may be a decent argument for a further 25bps cut next week, making Kiwi Dollar shorts high on the list. What would really see the markets get excited on the big day itself is if they were to surprise traders with a 50bps cut. It does happen.
As expected NZDJPY has seen the heaviest losses, currently down 2.75% and now approaching key swing lows. If there is any suggestion that we may become overextended it is hidden in the monthly ATR value which shows the high-low range is significantly larger than usual when compared with 5, 10 and 20 month averages. Of course this does not mean it cannot fall further, but the further it falls the more of a statistical outlier it becomes.
Kiwi Dollar nose divers following weak inflation read
Today's soft inflation data, its lowest since the 90s, saw traders waste no time in selling NZD crosses in anticipation of a further rate cut by RBNZ next week.