Maybank FX Note: NZD - Only a 25 Bps Cut At This Point - 23 Jul 2015

NZD: Only a 25 Bps Cut At This Point

        RBNZ cut OCR by 25bps for the second time in a row, taking the OCR down to 3% (early this morning). RBNZ cited softening in the economic outlook and low inflation as factors for the rate cut. The 25bps cut was widely expected by markets, while we were expecting a front-loading of 50bps cut.

        The accompanying statement was perceived to be slightly less dovish than expected. On rates, it mentioned that “at this point, some further easing seems likely” vs the previous Jun statement which said “further easing may be appropriate”. While the statement still suggests RBNZ remains on an easing cycle, the words “at this point” suggests some sense of “contingent easing bias” as compared to the previous statement where it was more of an “outright easing bias”. 

        On NZD exchange rate, while RBNZ maintained its stance that “further depreciation is necessary given the weakness in export commodity prices”, our caution for potential omission of words like “NZD remains overvalued” and “further significant downward adjustment is justified” materialised (those words were previously in the Jun statement). This was due to the accelerated decline in the NZD, by about 16% vs. the USD since late-Apr. NZ PM John Key told reporters at his weekly post-Cabinet press conference on 20 Jul that the NZD has fallen faster than anticipated.

        Post-RBNZ, NZD enjoyed a squeeze higher towards 0.6653 (at time of writing) despite the 25bps cut as market has already priced in. Last sighted at 0.6630, partially reversing some of its earlier gains. On FX outlook, we continue to caution for the near term prospect of an upside squeeze towards 0.6670 (23.6% fibonacci retracement of Jun peak to Jul trough), 0.6705 (21 DMA), amid stretched NZD short positioning.  We remain better sellers on rallies. Targeting an eventual break of 0.65-psychological support before bigger support at 0.64 (61.8% fibonacci retracement of 2009 low to 2011 high). (See note here for charts).

        On macro, we continue to reiterate our bearish bias for NZD on a combination of drivers CPI inflation at 15-year lows with risk of staying low for longer on low oil prices and weak dairy prices, prospect of dairy prices staying low for longer (9th consecutive decline and at fresh 12-year low), benign wage inflation, declining ToT amid weakening demand. We expect the RBNZ to cut another 25bp, possibly as soon as the next meeting at 10 Sep (3 more RBNZ meetings till end of 2015 – Sep, Oct, Dec).