- GBP/NZD could drift higher near term
- As RBNZ offers NZD scant support
- But, a final cut is getting closer
- Making GBP/NZD a candidate for bigger declines
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If the RBNZ finishes cutting in August, GBP/NZD quickly becomes a prime candidate for bigger declines.
The Reserve Bank of New Zealand (RBNZ) surprised no one when it kept interest rates unchanged today, but what was said about future direction is catching the attention of analysts.
The big takeaway is that it is clear the RBNZ is not done cutting, even if it has delivered six consecutive decisions of OCR cuts, totalling 225bps in easing.
Having kept interest rates at 3.25%, it indicated that it would drop them to 3.0% in August.
For foreign currency markets, that cut was therefore as good as delivered today, a good example of how currencies are forward-looking beasts that account for future developments in the present.
Previous rate cuts are helping the economy, yet growth is still struggling to gain meaningful traction, with business and consumer confidence surveys betraying a sombre mood.
The RBNZ is also more confident that inflation is increasingly becalmed within the 1-3% range targeted by the RBNZ.
Above: The recent uptick in inflation suggests interest rates will settle at higher levels.
These dynamics put August into play, but don't necessarily mean any more cuts will be forthcoming beyond this date, particularly given recent signs of stubborn inflation.
For NZD, the key driver will quickly become what happens beyond August, because if expectations for a continuation of the cycle to below 3.0% build, then NZD is likely to struggle.
However, should the data, guidance, and the August event itself suggest that the cycle is complete, then the Kiwi could be in a position to start strengthening more sustainably once more.
Volkmar Baur, FX Analyst at Commerzbank, says Wednesday's policy update points to continued caution on the part of the RBNZ, "and we continue to assume that it will take at most one more step before the cycle ends. This should support the NZD."
Baur says an August cut would be "another possible cosmetic adjustment of 25 basis points than a real continuation of the cycle."
Above: New Zealand's growth has markedly undershot its Antipodean peer, Australia.
Mark Smith, Senior Economist at Auckland Savings Bank (ASB) says that a cautious, data- and event-dependent RBNZ is now set to emerge.
It will cut the OCR by 25bps in August, with the OCR ending the year at 3.0%, he says.
ASB thinks the RBNZ will be closely monitoring readings from inflation expectations surveys in the coming months for signs of whether near-term inflation readings are likely to recede.
"Core inflation readings from the RBNZ suite of core inflation measures will also be closely scrutinised, says Smith.
Should the RBNZ finalise the cycle in August, the NZD will potentially find itself better supported against those central banks that are intent on cutting further.
A potential candidate for NZD to outperform is Pound Sterling, given the prospect of the Bank of England speeding up rate cuts.
Economists at Goldman Sachs think the Bank of England could shift into a faster gear, and start cutting interest rates at consecutive meetings, whereas it is now cutting at a slower quarterly rate.
"A generally softer set of labour market data, the slowdown in wage growth points to a meaningful undershoot of the BoE’s Q2 projection, which ties in with our economists’ call for a markedly lower terminal Bank rate than is currently priced," say Goldman Sachs analysts in a recent note.