Article / 22 September 2016 at 1:15 GMT

Stubborn NZDUSD fails to take RBNZ hint again

Managing Director / Technical Research Limited
New Zealand
  • NZDUSD sailed through unscathed following the Fed and RBNZ policy meetings
  • It held within a narrow 0.7375 – 0.7315 range
  • The exchange rate again failed to take on board the bank’s desire to see the Kiwi fall

By Max McKegg

NZDUSD was vulnerable to a double-whammy hit earlier today when the US Federal Reserve and Reserve Bank of New Zealand issued monetary policy review statements within three hours of each other. A Fed rate hike followed by a RBNZ rate cut would have knocked the Kiwi off its perch. The probability of either happening was less than 20%, but stranger things have happened and traders were on the alert.
In the event NZDUSD sailed through unscathed, having held within a narrow 0.7375 to 0.7315 range. Early in the Asian session today it was trading towards the top end.

 Time to buckle up ... having provided no new forward guidance, the RBNZ will likely ride it out until its next policy review on November 10. Photo: iStock
While the Federal Open Market Committee would have been happy enough with the market reaction to its statement – especially as it had shown up dissension in the ranks – for the RBNZ it was a case of more disappointment as the exchange rate again failed to take on board the bank’s less than subtle hint that it wants to see the Kiwi decline:
“Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector. A decline in the exchange rate is needed."
The problem is illustrated by this chart of the Trade Weighted Index (click to enlarge). A reading of 78 places it well above the Reserve Bank’s projected path, the gradual decline needed to raise import prices and draw inflation back up into the 1-3% target band.

New Zealand Trade Weighted Index
Source: RBNZ, Metastock
The RBNZ won’t have been very surprised NZDUSD ignored its warning that “a decline in the exchange rate is needed” because it is a repeat of previous comments. 

It would have been more hopeful that the final sentence in the statement, containing the words “further policy easing will be required”, would have had more impact. But that too was just a cut and paste from the previous statement. 

So having provided no new forward guidance, it appears the RBNZ is preparing to buckle in and ride it out until its next policy review on November 10 when the promised rate cut is almost certain to be activated (although market pricing has the probability at only 70%). 

In between times more bad news will be delivered via the third quarter CPI number on October 18. It will show annual inflation falling back towards zero. Today’s statement acknowledged that “the sustained weakness in headline inflation risks further declines in inflation expectations”; every central bank’s nightmare.
It’s a long wait until November 10 and markets are likely to put the RBNZ’s feet to the fire in the interim, perhaps pushing the TWI up as high as 80. And even when the rate cut is finally delivered there is no guarantee it will have any lasting impact on the exchange rate. 

As shown by the dotted lines in the chart above, the last four cuts have not put a dent in the rising trend. So having delayed cutting rates this time around and getting no result from jawboning, the only other option the bank has to hold the line on the exchange rate would be intervention.
Like many other central banks, the RBNZ is ever hopeful that the Fed will ride to the rescue by increasing the federal funds rate and putting upward pressure on the USD. More disappointment on that front today as well. The best Chair Janet Yellen could offer was a non-committal “We judged that the case for an increase had strengthened but decided for the time being to wait for continued progress toward our objectives”. Three of the 10 voting members dissented, preferring to raise rates immediately.
While only 10 of the 17 members of the FOMC get to vote on policy changes, all of them submit economic projections, and these combine to produce the “dot plot”, showing the projected path for the federal funds rate out to 2019. 

The green line in the chart below is the median projection. Of note, most dots are above 0.50% by the end of the year, suggesting a firm majority in favour of raising rates at the December meeting.

Implied fed funds target rate
Source: Bloomberg
In her post meeting press conference, Yellen addressed recent criticisms about Fed policy made by US presidential candidate Donald Trump saying “partisan politics” plays no role in any decisions the FOMC makes. 

Her stand could be put to the test in the next few weeks. The committee meets again on November 1-2, a week before the Presidential election, and if economic data strengthens in the meantime there will be a good case for increasing the fed funds rate at that meeting. 

Indeed, as this chart shows, markets are already pricing in a 23.6% probability of the Fed being put in exactly that position. You would think a rate hike just before the election would be just what Trump wanted but he probably thinks he will get more publicity by attacking the Fed no matter what it does.

Fed funds probabilities
Source: Bloomberg
If the RBNZ is serious about triggering a fall in NZDUSD, today’s monetary policy statement was a wasted opportunity. The market brushed off guidance that “ a decline in the exchange rate is needed”. Action, not words, is required and that’s not likely now until the bank’s next review on November 10. Expect upward pressure on the TWI in the meantime. 

The FOMC statement gave no assistance; in fact the USD declined in the aftermath. The Fed will be in a tricky position if economic data is positive in the next few weeks justifying a rate hike on November 2, just ahead of the Presidential election.  

– Edited by Gayle Bryant

Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade or article then click here or post your comment below to engage with Saxo Bank's social trading platform.
Patto Patto
Nice work. What's your call on AUDNZD now ?
Max McKegg Max McKegg
thanks. Recovery potential and Buying this latest reaction
FxCox FxCox


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