The consensus is 50bp, market pricing leans towards 75bp. Whatever the RBNZ decide to do today, it comes down to whether they will signal further cuts, as to whether NZD/USD continues to depreciate or bounce on a “sell the rumour, buy the fact” reaction.
By :Matt Simpson, Market Analyst
The RBNZ are widely expected to cut their cash rate by 50bp today, from 4.75% to 4.25%. This would mark their second consecutive 50bp cut of the cycle and also see send their cash rate beneath the RBAs for the first time since the pandemic. But with the 50bp cut likely already priced in, traders will want commitment to further cuts signalled today.
And they just might, given economic data continues to underperform and warn of a recession while headline CPI and inflation expectations remain well within the RBNZ’s 1-3% range. Even a 50bp cut today would still leave the cash rate 205 bps above CPI.
And given the RBNZ do not meet again until February, a 75bp cut could also be factored in, although I see this as an outside chance as they have only performed such chunks cuts during the GFC and pandemic. Still, market pricing is leaning towards it.
- The 1-month OIS (overnight index swap) shows a 50bp has been fully priced in
- It also shows a 76% chance of a 75bp cut
- The 3-month has fully priced in an additional 25bp cut for February
Click the website link below to get our Guide to central banks and interest rates in Q4 2024.
https://www.forex.com/en-us/market-outlooks-2024/Q4-central-banks-outlook/
Could the threat of an inflationary Trump administration derail a dovish cut today?
No, I do not think so. The RBNZ have an established track record of grabbing the bulls by the horns and getting ahead of the curve. And even if they were to be wary of Trump’s inflationary policies, a cut today gives them more room to hike later – which suits their hands-on style. But more importantly, Trump’s announcement of a 25% tariff on Canada and Mexico (and an additional 10% on China) should make today’s decision easier for the RBNZ.
While the Trump administration did not directly impose tariffs on New Zealand (or Australia for the matter) during his first term, tariffs still made an indirect impact on export nations such as New Zealand due to the global supply chain network. And a way to combat that is to weaken a currency via interest rate cuts.
But has a dovish cut already been priced in?
Net-short exposure among large speculators reached its most bearish level since December last week according to CME futures data. BY recent standards this could be considered as a sentiment extreme, with gross-shorts rising to their highest level since before the pandemic. Prices are also hovering around the October 2023 lows after a 2-moth decline, so it is plausible that the current leg lower may be running out of steam.
Perhaps we’ll get another pop lower today on the delivery of a dovish cut. But it could be argued that the current decline from the October high is becoming long in the tooth and due a pullback. The USD is also showing signs of exhaustion.
But as we approach and enter the new year, NZD/USD could have a lot further to fall as it presumably embarks on the ‘race to the bottom’. Net-short exposure has been roughly twice as high looking at data back to 2019.
Events in focus (AEDT):
- 11:30 – AU Weighted mean CPI, construction work done
- 12:00 – RBNZ interest rate decision
- 12:30 – CN industrial profit YTD
- 13:00 – RBNZ press conference
- 00:30 – US GDP revised (Q3), jobless claims
- 02:00 – US core PCE inflation
Click the website link below to get our exclusive Guide to AUD/USD trading in Q4 2024.
https://www.forex.com/en-us/market-outlooks-2024/Q4-aud-usd-outlook/
NZD/USD technical analysis:
The Kiwi dollar has fallen over -9% since its September high to mark its most bearish run of the year. A dovish cut today could see prices attack the October low, but I feel the pair is also vulnerable to a “sell the rumour, buy the fact” after the event. Therefore, I’m on guard for at least some mean reversion higher as we head towards the weekend.
Beyond that, I also suspect NZD/USD will remain vulnerable to “fade the rally” traders who are lurking around resistance levels, looking to reload. A move down to 56c (near the September 2022 VPOC) could then be on the cards.
AUD/NZD technical analysis
An established uptrend is apparent on the daily chart, although prices are now retracing lower after signs of exhaustion around the July high. The daily RSI (2) is not yet in the oversold zone, so perhaps the pullback has more to give.
However, I am keeping an eye out for evidence of a swing low to form around 1.1047 (HVN) and the 1.10 handle in anticipation of its next leg higher. And this is based on the assumption that the RBA are in no position to cut rates whereas the RBNZ could continue to cut into next year.
View the full economic calendar
– Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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