Maybank FX Notes: NZD - Easing Bias Remains - 29 Oct 2015

NZD: Easing Bias Remains

§  RBNZ kept policy rate on hold at 2.75%, in line with our expectation in the RBNZ meeting early this morning. While rate was on hold (“watch and wait” stance), easing bias remains.

§  RBNZ’s accompanying statement said some further reduction in OCR seems likely to ensure future average CPI inflation settles near the middle of the target range (1 - 3%). To recap, 3Q headline CPI inflation was 0.3% q/q, slowing from a pace of 0.4% q/q in 2Q. Non-tradables inflation (which refers to domestic price pressures) was zero for 3Q, slowing from 0.1% q/q in 2Q. On annual basis, non-tradable inflation was 1.5% in 3Q. This is the lowest level in more than 14 years and continues to suggest that NZ is in a period of structurally low inflation.

§  RBNZ attributed a combination of earlier strength in the NZD and the 60% decline in oil prices since mid-2014 to the lower than targeted inflation. In particular, it also made reference to the rise in exchange rate since Sep and cautioned that if such rally is sustained, it could dampen the tradable sector activity and medium term inflation. It then added “this would require a lower interest rate path than would otherwise be the case”. This suggests that Kiwi may need to see further weakness, which is in line with our call for further Kiwi weakness into year-end or risk further rate cuts.

§  We continue to reiterate our call to fade against NZD strength, which could be possible over the short term against a backdrop of possible monetary easing elsewhere which could lend temporary strength to sentiment, and spill over to risk proxies including the NZD.

§  In addition a rebuild of market expectation (following recent FOMC meeting) for Fed to potentially hike rate in Dec could result in a build-up of USD strength in coming weeks.  Implied probability of Fed move in Dec (implied from Fed Fund futures) has now risen to 48%, from 33% before the FOMC meeting. This will lead to growing monetary policy divergence with Fed tightening vs. RBNZ risk of further easing. This is expected to favour USD strength over NZD.

§  Post-RBNZ, NZD has since recovered marginally to 0.6675 levels (vs. 0.6623 lows this morning).  We had said (in our GM Daily) that a break below 0.6740 (23.6% fibo retracement of Sep low to Oct high) on daily close basis could suggest further downside towards 0.6600 (100 DMA), 0.6500 levels (50 DMA, 61.8% fibo).  Daily momentum and stochastics are showing further signs of bearish bias. We continue to maintain our call to stay short NZD. Favor adding to shorts on rallies towards 0.6740.