NZD falls heavily against majors for second consecutive day; forecast for NZ's OCR now 2.5% by October; Greece's liquidity noose loosens with emergency funding

By Raiko Shareef

The NZD once again holds the wooden spoon on the major currency leaderboard, after a soft local CPI report re-ignited the negative momentum seen on Wednesday night.

EUR sunk lower, as the ECB vowed to ease policy further if monetary conditions tightened.

According to yesterday’s report, inflation is rising at 0.3% y/y, consistent with the RBNZ’s forecasts, but below our own.

The details point to soft price pressures across a broad swathe of the economy.

This will mean the RBNZ will have no qualms about easing policy much further in coming months. We see the Bank taking the OCR from 3.25% today, to 2.50% by the October meeting.

We now forecast the trough in NZD/USD to be 0.60 in Q1 2016, materially deeper and slightly earlier than previously envisaged.

This embodies a sharp descent from current levels. There is little reason to countenance a rally driven by local factors in the near-term.

We anticipate the RBNZ will deliver both the July and September rate cuts with a prominent easing bias, which will keep NZ rates depressed.  

But it is the commencement of the Fed’s tightening cycle that will do the lion’s share of the work in driving NZD/USD lower.

Broad measures of the USD have traded basically sideways for the past six months, and remain below the peak hit in mid-March.

We envisage the USD to gain broadly as the Fed lifts off the zero lower bound, come September.

NZD/USD is off by 1.2% this morning, taking its cumulative two-day loss to a rather painful 3.3%.

After some initial hesitation after the CPI report, NZD broke through important support at 0.6560, and traded below 0.65.

It has since steadied to just above that level, where there is some trendline support.

The NZD/AUD cross is sharply lower, down 1.6% to below 0.88, with the 2015 low of 0.8748 within striking distance.

Most of that weakness stemmed from the NZ side of the equation, but the AUD has also recovered about half the rather undeserved drubbing it received merely by association with NZD and CAD on Wednesday. We see the cross weakening to 0.86 by September.

Elsewhere, central bank speakers dominated the wires on an otherwise tame evening.

ECB’s President Draghi confirmed that the liquidity noose around Greece’s neck has been loosened somewhat, with a €900m top-up to its emergency lending facility.

But FX markets focused on his unwavering commitment to ultra-easy monetary policy, with a fresh vow to use every tool available to respond to any “unwarranted tightening” in monetary conditions.

GBP continues to outperform, as BoE Governor Carney talks a big game on interest rate hikes in the near future.

A decision on rates will be in “sharper relief” by year-end. Markets price in a UK lift-off by May 2016.

A relatively quiet end to the week beckons, and at least one NZD analyst will certainly be hoping so.

US and Canadian CPI and housing data are due. The UoM consumer sentiment survey will be the highlight.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.