NZD/USD: what’s next after RBNZ meeting?

This week NZD/USD tested the lowest levels since October in the area of 0.6525 after the Reserve Bank of New Zealand reduced its interest rate to 1.5%. Then, however, the pair managed to return back 0.6580. Is the negative pressure from the rate cut already gone?

The RBNZ was the first out of G10 central banks to lower the rate. It was the first rate cut in New Zealand since November 2016. The regulator explained its decision by external risks such as the global economic growth slowdown and trade tensions. It also cited some domestic problems including decreased population growth, subdued house prices, rising unemployment, and falling household spending. In addition, business sentiment remains low and New Zealand’s companies struggle for profit. The last but not the least is the fact that inflation was weaker than expected in Q1: CPI growth accounted for 1.5% versus the forecast of 1.7%.    

All in all, a rate cut wasn’t a big surprise for investors as everyone understood that the RBNZ will turn dovish in this kind of environment. The main question for the market now is whether the central bank will keep cutting rates this year or remain on hold from now on. Westpac says that a rate cut in August is more likely than in June, although the bank’s analysts expect the RBNZ to remain on hold until the middle of 2020. ANZ, on the contrary, says that May’s action of the central bank is only the first in the series and two more cuts will follow this year.

The regulator itself reduced the forecast for the Official Cash Rate (OCR) in June 2020 from 1.81% to 1.36%. Moreover, it reduced the inflation forecast for 2020 from 2.0% to 1.7% previously. Governor Orr said that a lower OCR is needed to support the outlook for employment and inflation consistent with its policy remit.

All in all, everything will depend on the incoming data. The next important releases are New Zealand’s retail sales on May 22, the nation’s trade balance on May 24, the RBNZ Financial Stability Report on May 29, and ANZ business confidence and annual budget release on May 30.

Technically, NZD/USD is squeezed between 0.6530 and 0.6630. On the upside, further levels to watch are 0.6690 (50% Fibo) and 0.6715 (200-day MA). Remember that the market is in the overall downtrend. Support is at 0.65 ahead of 0.6425. 

Author: FBS Analyst Team

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