The Reserve Bank of New Zealand Rate Review
As expected Kiwi traders experienced some whipsaw price action overnight. This was because the RBNZ left the Official Cash Rate unchanged at 1.5% at its June OCR Review. However, the RBNZ strongly hinted that it could reduce the OCR to 1.25%. The press release repeatedly stated that the outlook weakened. It twice said that “a lower OCR may be needed.”. The record of the Monetary Policy Committee (MPC) meetings was stronger. It stated that “members agreed that more support from the monetary policy was likely to be necessary.”
More on the MPC
The MPC “discussed the merits” of an immediate cut, but decided against such a move. It instead noted again that a lower OCR may be needed over time. This is very blunt language from the RBNZ, which has tended to keep its signalling fairly ambiguous in recent times. For example, back in March, the RBNZ’s language was the innocuous-sounding “the more likely direction of our next OCR move is down.”. What followed was an actual OCR cut at the next meeting. By comparison, this is a straightforward signal that the OCR is likely to head lower at some time.
Global Macro Concerns
The details of the press release and record of the meeting confirmed that the RBNZ remains heavily focussed on the global economy. The fact that the global economic outlook has weakened, and that downside risks have intensified, got plenty of column inches. The new feature was the RBNZ’s claim that the global slowdown is affecting the New Zealand economy via confidence, for example, by dampening business investment, as well as via trade and financial channels. Meanwhile, the RBNZ’s assessment of the domestic economy was more mixed. The press release emphasised the negatives, but the record of the meeting revealed that both positives and negatives were in sight. GDP was stronger than the RBNZ expected, but the Committee considered whether this would continue.
The housing market recently weakened more than the RBNZ expected. However, the RBNZ noted the impact that lower mortgage rates and the cancellation of capital gains tax could have. Market watchers interpret this to mean that the RBNZ is standing by its forecast of accelerating house price inflation. The RBNZ acknowledged that increased government spending was positive for the outlook. Yet they also discussed the possibility that the expenditure will see a delay.
One interesting strand of thinking that remains in the RBNZ’s commentary is capacity constraints. This came up in the context of the labour market and the construction sector. Meaning more members of the MPC remain worried about capacity constraints and the potential for inflation. However, the dominant theme was certainly downside risks. The RBNZ was very explicit that the outlook for inflation and employment has weakened.
August In Play
Overall, this was a reasonably clear signal from the RBNZ. It sets the scene for an August OCR cut, although it by no means seals the deal. This statement was close to market expectations. However, interest rates and the exchange rates kept volatile around the release. Eventually, it increased slightly only because the small chance of an OCR cut today was off the market pricing.
From a technical perspective, the bears’ failure to take out the .6480 support level saw traders covering their short positions and led to squeeze higher. The pullback looks poised to test the pivotal .6680/.6700 area, a close north of .6700 would be a bullish development targeting a test of .6770/.6790 area, where we can expect a pause, then as long as the pivot of .6680/.6700 acts as support bulls will focus on testing range resistance above .6900. A failure to close above the pivot at .6680/.6700 area would concern bulls and suggest the possibility of further bearish pressure and retest of support back down towards .6480.