The Reserve of Bank of New Zealand (RBNZ) will be deciding on interest rates on Wednesday at 2100 GMT. The central bank is expected to hold rates steady at 1.75% and the meeting will be accompanied by a press conference by Governor Adrian Orr, and thus the focus will be on the statement for any updates.
In the previous meeting on August 8, the RBNZ left again its official rate unchanged at the record low of 1.75%, saying that economic growth has moderated while inflation is likely to increase in the near term due to higher fuel prices and a lower exchange rate. Moreover, policymakers mentioned that rates will remain at the same level through 2019 and into 2020. The central bank last moved its key rate in November 2016. At the press conference following the decision, Governor Orr said that if growth slows further below its potential rate, then officials would have to cut rates.
Last week’s GDP figures have helped to relieve concerns that the economy is heading into a slump. The New Zealand economy advanced by 1% on a quarterly basis in the second quarter of this year, accelerating from 0.5% previously and beating market expectations of 0.7%. It was the largest quarterly rise in two years. Meanwhile, consumer prices were the second slowest in the last six quarters during April-June, increasing by 1.5% in yearly terms versus a 1.1% increase in the prior quarter.
However, despite the pickup in growth, the RBNZ remains concerned about persistently weak business confidence as it dropped to a 10-year low in August. The dire business sentiment readings have raised fears that firms are holding off on investment decisions and this may reduce economic growth in the coming quarters, which would drive the kiwi lower. Governor Orr recently cited this as the biggest downside risk, warning that “people talk themselves into not investing”.
Ahead of the RBNZ policy decision and any updates on global trade between the US and China, as well as countries/blocks that were traditionally considered as US allies, such as the EU and Canada, will also be closely watched by market participants.
Antipodean currencies, such as the kiwi and the aussie, have been suffering lately on the back of trade jitters instigated by President Trump’s trade rhetoric. In this respect, comments on trade in the RBNZ’s statement will be of particular interest.
An upbeat take on the economic outlook is likely to boost NZD/USD, with resistance to advances possibly coming around the 0.6700 level and the 23.6% Fibonacci retracement level of the down-leg from April 13 to September 12 of 0.6710. A more bullish movement would turn the attention to the 0.6760 barrier, identified by the peak on August 8, before heading towards the 38.2% Fibonacci of 0.6840.
On the downside, and in the case of a cautious RBNZ that expresses concerns about the growth outlook, NZD/USD is expected to lose more ground. Initial support to declines could come from the zone around the 40- and then the 20-day simple moving averages (SMAs) at 0.6630 and 0.6600 respectively. The two-and-a-half-year low of 0.6500 from September 11 lies not far below and would be eyed in case of steeper declines.
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