NZDUSD primed for action ahead of Fed meeting
- Prices come in under expectations at latest dairy trade auction
- Markets pricing in only one-in-three chance on another RBNZ rate cut
- No leaks to the contrary suggests that the FOMC is ready to raise rates
By Max McKegg
NZDUSD has had its wings clipped over the last 12 hours but still looks firm heading into the Federal Open Market Committee meeting. A weaker than expected dairy trade auction and a solid US inflation report that boosted the USD, saw the Kiwi coming off a one month high of 0.6825 to settle around 0.6760.
Outperformance against the AUD continues. In the fortnightly dairy trade auction, whole milk power prices rose 2%. Futures markets had suggested a 9% increase. New Zealand is the world’s largest exporter of dairy products and has been reducing the amount on offer for some time. Expectations are that the El Nino weather pattern will further reduce production over the summer months. However this is being counteracted by excess supply in the European Union.
The RBNZ’s baseline case (“Central Projection”) is that export prices will increase gradually over the next three years. But the margin for error is slim. The bank says that in a scenario where instead of a gradual rise export prices decline 6% or more over that period “the consequent fall in national incomes would be significant and protracted”, acting as a further drag on already below-target inflation and therefore warrant more monetary policy stimulus.
They calculate that “interest rates would need to be about 50 basis points lower” for inflation to remain on track to the 2% target.
Scenario for 90-day interest rates
Source: Reserve Bank of New Zealand
We’ll see about that. It seems to me the markets are underplaying the chance of further falls in dairy prices and hence the interest rate cuts the RBNZ says would follow. But that will be next year’s story.
Source: ASB Bank
As the chart below shows, the headline rate rose 0.50% year on year, slightly ahead of expectations, while the core rate has hit the magical 2% level. However, the Federal Reserve’s benchmark inflation measure, the price index of Personal Consumption Expenditures (PCE) remains somewhat below that number, something chair Janet Yellen is sure to comment on in her press conference.
The reaction in the FX markets is hard to predict, but price action in NZDUSD seems to suggest it will be the old story of buy-the-rumour-sell-the-event for the USD.
NZDUSD daily chart (click to expand)
-- Edited by Adam Courtenay
Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade, then click here to follow him.