NZD Fundamental View
At their November meeting, the RBNZ surprised markets by maintaining its Official Cash Rate at 1.00%, versus expectations for a 25bp rate cut to 0.75%.
The RBNZ justified its decision to stand pat by arguing that economic developments do not warrant a change to monetary policy at this time. Additionally, the RBNZ failed to signal any future change with RBNZ’s Hawkesby stressing that data would determine what the RBNZ does.
With the RBNZ shifting to a data-dependent stance, they are expected to now pause from further easing with just a 16% probability of a February cut according to futures prices.
Going forward, data will be key to assessing New Zealand’s monetary policy outlook. Recent data has been rather positive and typically exceeded expectations with Citi’s economic surprise index residing at a comfortable 37.8.
December’s Q3 GDP report was overall mixed with GDP Q/Q beating expectations at 0.7% versus consensus of 0.6% while Q2 GDP Q/Q was revised lower to just 0.1% from 0.5%. Nevertheless, with Q3’s report still more than double the RBNZ’s own expectation of 0.3%, most analysts believe it was positive enough to support expectations for the RBNZ to hold policy in February.
Finally, it’s worth noting that in the short-term, given its high-beta status, NZD will be influenced by the prevailing risk tone, strengthening in risk-on environments and weakening in risk-off environments.
Pay particular attention to US/China developments and the global economic outlook, two factors that have had a significant influence on NZD over recent months.
USD Fundamental View
At present, there are two major drivers of USD, the FOMC’s monetary policy outlook and the US/China trade war outlook.
The FOMC is now on hold, with policy members signaling no expected change to monetary policy through 2020 followed by a hike in 2021, according to their December dot plot.
The Fed’s expected rate path is at odds with the market; however, as futures markets currently place a 58.7% probability of a 25bp rate cut over the next 12-months.
Regarding the US/China trade war, the outlook has notably improved following the conclusion and agreement of their phase one trade deal negotiations. China’s Vice Premier Liu He is expected to sign the deal today in Washington.
The improving outlook for US/China trade should ultimately prove USD supportive as it eases some of the market’s concerns over the US economy. However, trade negotiations are not concluded, and phase two of negotiations is likely to be considerably more challenging.
The primary focus for phase two will be on one of the US’ key complaints – the theft of US intellectual property. Other key issues include Chinese subsidies to domestic companies, industrial espionage, copyrights, privacy and security; and compliance with those key issues.
As such, US/China relations will remain key for USD going forward. Additionally, keep an eye on US economic data, especially inflation data which the Fed has made clear needs to show a more persistent increase before even considering tightening policy.
NZD/USD Technical View
From the present rate, support is identifying at 0.6570 to 0.6550 area. Trump has signed phase deal 1. So AUD and NZD should be supportive. So 0.6570 to 0.6550 area would be hard to break out. In case 0.6550 breaks and stable below the next target is 0.6465. and Final support is identifying at 0.6280.
On the other hand, the present rate is lucrative for buying. 1st target should be near 0.6750 area. And the final target could be at 0.6930.