BNZ maintain call for November RBNZ rate cut

The Bank of New Zealand morning commentary today takes note of the NZD after the RBNZ decision and statement on policy:

• The NZD/USD did not show a significant response, settling into a range for much of yesterday
• at 0.7300 currently & NZ TWI has also traded lower
• This will be welcomed by the RBNZ that yesterday reiterated that; "A decline in the exchange rate is needed"

• RBNZ confirmed its easing bias
• RBNZ downplayed recent positive domestic developments & global backdrop still seen as uncertain (outlook for global growth, commodity prices and the political environment)
• Inflation is seen as being held down by negative tradables inflation but the RBNZ expects a rise from the December quarter ... but the RBNZ still sees negative risks to inflation

NZD/USD forecast for the week of September 26, 2016

The New Zealand dollar initially tried to rally during the course the week, but turned back around form a fairly negative candle. By doing so, it looks as if we are going to test the 0.70 level below, which should be supportive. But a break down below there we should send this market much lower, perhaps reaching towards the 0.70 level. Any rally at this point in time I think will struggle, as the market looks very tight to see the very least and obviously we have a massive resistance barrier at the 0.75 handle.

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NZ trade balance data for August from Statistics New Zealand

• expected -735m, prior -433m

• expected 3.6bn, prior 3.96bn
• Down 8.7% y/y

• expected 4.30bn, prior 4.4bn

• Milk powder exports fellto the lowest level since August 2009
• All top destinations of milk powder fell in value and quantity, with both China and the United Arab Emirates seeing a drop in value of over half
• The fall in meat exports is partly due to a record high meat season this time last year
• "The large fall in export value this month comes off the back of high export volumes in the June quarter," international statistics senior manager Stuart Jones said

NZD/USD Undermined by Bloated New Zealand Trade Deficit

The New Zealand dollar remained under pressure during the Asian session on Monday with a test of the 0.7230 area in NZD/USD and the lowest reading for close to two weeks.

Global risk appetite was more fragile, which undermined overall confidence as Asian equity markets came under pressure.

The latest New Zealand trade data was weaker than expected with an August deficit of NZD1.3bn and substantially worse than the expected NZD735mn shortfall with an 8.7% annual decline in exports. There have only been seven instances of a monthly trade deficit above NZD1.0bn in the last 10 years with three of those in August.

The data undermined the New Zealand dollar, although milk prices have recovered since then, which provided some net relief.

Even with domestic interest rates at record lows, New Zealand rates are still well above average G7 levels and there will be flows into the currency when overall risk appetite remains robust. The reverse will be true when risk conditions deteriorate with a weaker local currency and there was evidence of carry trades being closed, especially as the Euro maintained a firm tone.

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New Zealand - Building permits (August): -1% m/m (prior -10.5%)

NZ Building Consents

• prior -10.5%

NZD/USD forecast for the week of October 3, 2016

The NZD/USD pair initially tried to rally during the course of the week, but fell backwards as we ended up forming a less than impressive green candle. If we can break down below the 0.72 level, I believe at that point in time the market will then drop to the 0.70 level below. If we do rally from here, I believe that the 0.75 level above will continue to offer massive resistance. With this, I remain a bit skeptical of this market and I would also point out that the 0.75 level above was the 50% Fibonacci retracement level on the longer-term charts. On top of that, the monthly candle for September ended up forming a nasty looking shooting star, so I think this point in time we may see a little bit of a pullback at this point that could drop us not only down to the 0.70 level, but beyond there as well.

I think that the New Zealand dollar has been benefiting from the fact that there is such a low interest-rate environment, and therefore the swap that you get from owning this pair is a bit attractive when bonds offer nothing. However, the New Zealand dollar tends to be more of a “risk appetite driven currency”, and as a result it’s likely that the market will continue to follow the commodity markets overall. After all, commodities tend to do better when there is more of a positive risk appetite attitude.

One of the things that you can follow in order to get an idea as to how the commodity attitude around the world is functioning is the CRB Index. The CRB Index is an ETF that coincides with core commodities around the world in order to measure how commodities in general are performing. With this, you can also look at it as a bit of a gauge on where risk appetite is, and with that of course you can look at stock markets to give us an idea as to how enthusiastic traders are around the world when it comes to risk appetite. So, pay attention to stock markets, commodities, and that should give you an idea as to where this market should go.

NZD/USD Weekly Forecast October 3-7

NZD/USD started the week off on a bearish note as a technical break of a rising trendline from late May lows pointed to a broader decline in the pair. A continuation was not seen, however, as a support zone near 0.7245 held the pair higher, and the catalyst for a continuation lower was lacking. The pair has posted a small gain in the past week, leading to a bullish engulfing candle print on the weekly chart, but data in the upcoming week stands to set a clear directional bias for the pair.

Data in the upcoming week will be focused on Friday’s NFP figures out of the United States. Speculation over a rate hike in the United States continues to be the biggest driver among the majors, and with the jobs report carrying a strong relation to the Fed’s dual mandate, a stronger figure would stand to further increase optimism of a move later this year. Out of New Zealand, Governor Wheeler delivers a speech on Monday, and Global Dairy Trade figures (GDT) will be released on Tuesday.

Wheeler’s speech is not likely to bring volatility to the markets. He is not expected to discuss monetary policy and has already been very clear as to the RBNZ’s stance on further easing. Wheeler has previously dismissed the idea that the central bank would move to a more aggressive path of easing, or even a less aggressive path for that matter. The central bank may look to remain on hold until there is further clarity on the Fed’s path of normalization.

The GDT price index can introduce some volatility. The figure had shown strength in August and early September, but the latest figure indicated subdued growth. There will be a spotlight on this week’s number from that perspective as a weak reading would suggest that sector continues to display weakness despite three strong readings from early August.

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NZD/USD forecast for the week of October 10, 2016

The NZD/USD pair initially tried to rally during the course of the week and then sliced below the 0.72 handle below. With this being the case, I feel that we are going to continue to try to grind towards the 0.70 level, but it might be easier to do off of shorter-term chart. Rallies at this point in time will more than likely be sold off, as I believe we will have to find more significant support below in order to start going long yet again, so patience would be needed for anybody bullish.

New Zealand - Retail card spending (September): +1.9% m/m (expected +0.8%)