The New Zealand dollar is the weakest currency today in the morning from the world's major currencies quoted against the US dollar. NZD's weaknesses added after the publication on inflation expectations data, which increased the chances of interest rate cuts by RBNZ tonight.
The NZD/USD currency pair was down nearly 0.7 percent tonight after the news hit the market that two-year inflation expectations fell to 1.8 percent in the fourth quarter from 1.86 percent in the third quarter. Investors in response to the publication were not only to sell the New Zealand currency but also to increase the chances of RBNZ cutting interest rates tomorrow. According to interest rate market participants, the probability of cutting the main interest rate in New Zealand increased to 76 percent on Tuesday from 64 percent on Monday.
The market and economists agree in this case because they expect a cut from 1 percent to 0.75 percent during the decision, which will be made on Wednesday, November 13 at 02:00. This would mean deepening the already historically low interest rates in New Zealand. As a result, RBNZ may continue its monetary easing policy as opposed to signals from other central banks. It seems that most of them signal a pause in further interest rate cuts, and the progress of the US-China trade agreement slightly reduces external risk, among others for the New Zealand economy.
Nevertheless, growing signs of economic weakness, including deteriorating inflation expectations, may convince the RBNZ to cut further by 25 basis points. Data from the New Zealand labor market in the third quarter were disappointing and employment growth reached its lowest level in six years. Wage growth also fell. Despite the fact that in 2019 the RBNZ lowered the main interest rate by 75 basis points, the surveyed corporate confidence and inflation expectations point to a further short-term slowdown in domestic growth.
One of the factors supporting the New Zealand economy is the New Zealand dollar, which thanks to its weakening by more than 15 percent from the beginning of 2018, on the one hand, it has increased the competitiveness of the country's exports, and on the other hand, has been causing import of inflation. Otherwise, if not for such a weakening of the currency, NZ's situation could be even worse. Hence, it seems that RBNZ could cut the main interest rate only to maintain the weakness of its currency.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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