RBNZ Rate Decision This Evening

August 10, 2016

The Reserve Bank of New Zealand (RBNZ) will announce a rate decision at 22:00 GMT+1, which will be followed by a statement from Governor Graeme Wheeler. The RBNZ has stated on 21st July that further QE will be required to ensure the future inflation settles near the middle of the target range and a rate cut is expected.

The market and many analysts expect that the RBNZ will cut rates by 0.25%, from 2.25% to 2.0% today despite a rate cut will lead to further booming of the overheated housing market as mortgage rates will be lower. Some even predict another rate cut may happen in November. The market expectations weigh on the New Zealand dollar.

The annual inflation rate has been below 1% for seven consecutive quarters since Q4 of 2014, and below 2% since the end of 2011. The Bank’s inflation target range is between 1% to 3% with a focus on the midpoint of 2%.

In order to grapple with low inflation rate and the strengthening of the NZD may hamper the economy and drive down inflation, the RBNZ might be the next central bank to cut rates, following the Bank of England and the Reserve Bank of Australia.

However, even if rates are cut to 2%, the likely subsequent fall of the NZD may not be a sharp one for four reasons. Firstly, the 2% rate is still comparatively higher than the rates of other major currency countries. Secondly, the dollar strength has been fading since yesterday. Thirdly, the market has priced in to an extent. If the result is in line with the expectation, then the NDZ may fall initially then followed by a rally as the market will price out. The NZD could fall deeper if the rate cut is accompanied by more than expected additional QE measures.

Fourthly, the overall economic outlook seems to be positive. The Q2 GDP figure released on 15th June was 0.7%, beating the expectation of 0.5%, yet lower than the previous figure of 0.9%. The Building Permit in July was up from -0.9% in June to 16.3% in July, reaching the highest level since August 2015. The Business Confidence was 16.0, reaching the peak of this year.

On the daily chart, NZDUSD has been oscillating in an uptrend channel since 20th Jan, and forming a head and shoulder pattern since mid-June, indicating accumulated upside selling pressure. The resistances at 0.725 followed by 0.732. The supports at 0.7053 followed by 0.7053, 0.70, 0.695, 0.692, and 0.688.

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