Fx flash nzd resilience as rbnz ends easing bias 10 november 2016

FX Flash

Group Economics Macro & Financial Markets Research

10 November 2016

NZD resilience as RBNZ signals end of easing bias Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 RBNZ cuts OCR by 25bp to 1.75%...  … external uncertainty and strong NZD concerns remain  RBNZ likely to keep OCR unchanged well into 2017  2016 year end NZD/USD forecast: 0.73

RBNZ cuts OCR by 25bp… external uncertainty and strong NZD concerns As expected, the Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate (OCR) by 25bp to 1.75% early this morning. The RBNZ statement was slightly dovish, highlighted concerns regarding weak global inflation, heightened political uncertainty and elevated volatility. In addition, the RBNZ warned that the New Zealand dollar (NZD) is stronger than is sustainable for balanced economic growth and is likely to result in negative inflation in the tradables sector. Hence a decline in the exchange rate is needed.

RBNZ likely to keep OCR unchanged well into 2017 We maintain our view that the RBNZ is likely to keep the OCR unchanged at 1.75% well into 2017 given the need to balance strong domestic growth and financial stability concerns due to house price inflation. Indeed the RBNZ stated that house price inflation remains excessive and it is uncertain if the recent moderation in house price inflation will be sustained given the imbalance between supply and demand.

The RBNZ has also upgraded its 2016 and 2017 year end inflation forecast to 1.1% (from 1.0%) and 1.7% (from 1.6%) respectively. Financial markets are pricing in that the RBNZ will start tightening monetary policy in late 2017. W hile this is possible given that inflation is projected to rise to 1.7% by the end of next year, it is worth noting that this is based on the RBNZ’s forecast that the NZD trade weighted index (NZD TWI) will decline from current levels of 78.80 to 76.8 and 75.1 by the end of 2016 and 2017 respectively. In our view, it is unlikely that the NZD TWI will decline by almost 3% over the next six weeks as a rate by the Fed next month is about 80% priced in.

2016 year end NZD/USD forecast: 0.73 On balance, we have upgraded our 2016 year end NZD/USD forecast from 0.70 to 0.73.

We do not rule out that the RBNZ may intervene in the currency market given that the NZD TWI is near levels when the RBNZ last intervened heavily to weaken the NZD in

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FX Flash - NZD resilience as RBNZ signals end of easing bias - 10 November 2016

August 2014. However in our view this remains highly unlikely for now as dairy prices are higher and speculative positioning in the NZD is not as extreme compared to in August 2014. Our 2017 NZD/USD forecasts are under review.

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FX Flash - NZD resilience as RBNZ signals end of easing bias - 10 November 2016