NZD: Downward bias for the week ahead – BNZ

Jason Wong, Senior Market Strategist at BNZ, sees the bias for the week ahead remaining to the downside for the NZD after it fell last week on all the key crosses, down 1½% against the USD, JPY, EUR and CNY and down ½% against the AUD and GBP.

Key Quotes

“NZ HLFS employment growth was much weaker than expected, but the rest of the labour market data suggested a tightening labour market and hints of wage inflation bottoming out.”

“The market reaction wasn’t deserved based on the data alone, but it was a good excuse to sell the NZD, after its blistering run heading towards the end of July. Net speculation positioning remains extremely long NZD (close to a record high), making the currency vulnerable to the downside on any negative news. The move up through USD 0.75 proved to be a step too far. The NZD has settled around 0.74, helped by a strong US employment report that keeps alive the prospect of another rate hike later this year, although the market remains fairly sceptical.”

“We see the bias for the week ahead remaining to the downside for the NZD. Thursday’s Monetary Policy Statement shouldn’t offer much support for the NZD. The underlying message will be that the RBNZ is in no hurry to join some other major central banks in looking to remove policy accommodation. In fact, we expect inflation forecasts to be reduced a little, reflecting the strength of the NZD more than offsetting any possible inflationary impulse from stronger terms of trade.”

“We doubt the RBNZ will up the rhetoric on the NZD. At the June OCR Review, when the NZ TWI was trading close to the current level, the Bank stuck to the facts, noting the prior increase in the TWI, partly explained by higher export prices. The Bank merely suggested that “a lower NZD would help rebalance the growth outlook towards the tradeables sector”. We expect similar language.”

“Overall, the Bank’s Statement should read slightly more dovish than the May Statement, but this shouldn’t surprise the market. From a relative monetary policy perspective the Bank’s stance likely won’t be lending any support to the NZD through the rest of the year.”