Rates Held At Record Lows
With the RBNZ having unexpectedly cut rates by .50% at its last meeting, there was a lingering sense of caution coming into yesterday’s meeting. While the bank was not expected to cut rates again, there was certainly the sense that the market was not looking to be caught off guard again. However, ultimately there were no fireworks this time. The RBNZ kept rates on hold at record lows of 1% though in the statement accompanying the decision it noted that there is room for further easing if needs be.
NZD moved higher in response to the decision, likely some position squaring from those who had entered into tentative shorts ahead of the meeting. While the statement contained little changes from last time around, the bank continued to cite ongoing US - Sino trade tensions as a risk to its outlook, keeping the risk of a global recession in the spotlight.
The statement noted that “The Monetary Policy Committee agreed that new information since the August Monetary Policy Statement did not warrant a significant change to the monetary policy outlook,”
Indeed, while the bank noted that its monetary policy has interest rates at historically low level, the market can expect interest rates to be “low for longer”. The language used here also provided NZD with some upside as the bank was seen altering this sentence from “lower for longer” last time around. This subtle change indicates that the bank is likely to remain on hold in the near term, referring to the conditional easing the bank spoke of last time around.
Referring to the progress made this year, the RBNZ noted that the reduction in the OCR has helped push NZD down with low rates also helping to lift inflation back towards the midpoint of its target range at 2%, while employment remains roughly at full capacity.
In terms of further forward guidance, the statement noted “There remains scope for more fiscal and monetary stimulus, if necessary, to support the economy and maintain our inflation and employment objectives,”
November Rate Cut In Question
On the back of the decisions, the market pricing for November cut stands at around two thirds. The key marker to watch over the near term will be the progress in US – Sino trade negotiations. The trade war has been a big drag on the New Zealand economy, as well as the global economy. Any positive developments in that space, such as the potential interim deal which has been floated recently, could offer some breathing space for central banks. However, the positive transmission for the global economy would take some time and in the interim, further easing could certainly be warranted.
However, the RBNZ noted that it remains confident that accommodative monetary policy along with increased fiscal spending will help support a rebound next year.
Technical & Trade Views
NZDUSD (Neutral, Bearish below .6395, bullish above)
NZDUSD from a technical and trade perspective. NZDUSD has tested bids around the .6727 level and is holding up for now. With long term VWAP still bearish, another leg lower cannot be ruled out. If we break down to new yearly lows I will be monitoring a retest of the yearly S1 to position for further downside. However, bullish divergence in momentum studies along with a potential double bottom pose the risk of a further move higher. If we break back above the monthly pivot, price could be setting up to make a move back up towards long term VWAP.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!