New Zealand Dollar is under heavy bearish pressures, apart from Fed rate hike projection that multiplied with the NFP improvement, also because of wide speculation about rate cut by Reserve Bank of New Zealand (RBNZ) that possibly will be announced in Thursday.

US Dollar appreciation following Nonfarm Payrolls data release last week continue to pressure commodity prices, and along with it, the correlated Commodity Dollars. Meanwhile, after main majors stands in the spotlight last week, now it is Comdoll that takes the stage, although US Dollar is still the current MVP on field.
 

Dolar


New Zealand Dollar is under heavy bearish pressures, apart from Fed rate hike projection that multiplied with the NFP improvement, also because of wide speculation about rate cut by Reserve Bank of New Zealand (RBNZ) that possibly will be announced in Thursday. Add that with rumor of milk contamination today, Kiwi has dropped from 0.75 to 0.73 in a week ahead of RBNZ announcement. 

 

Deflationary Pressures: Rate Hike Not Possible

RBNZ has hiked rates in four from eight meetings last year which place OCR rates at 3.5%. The central bank is the only major reserves to hike rates in 2014. However, global deflationary pressures has became heavier along with significant drop on oil prices in the last quarter of 2014. New Zealand Dollar too, cannot shake the effect of this global trend, with inflation gradually fell during and at the fourth quarter of 2014  only noted at 0.8% (yoy), far from the expected 1-3%. 

 

Inflasi

Quarterly New Zealand Inflation (Year-on-Year) January 2012-December 2014 

In the last quarter, RBNZ has failed to reach its inflation target due to the cheap oil prices, and it is possible the same could happen again in this quarter. RBNZ inflation forecast in the fourth quarter of 2014 was 0.1% (qoq), but the actual figure was just -0.2%. RBNZ inflation forecast for the first quarter of 2015 is 0.4% (qoq), but Westpac Ready Reckoner mentioned that inflation possibly will only attain -0.2%. As we all know that high inflation is an unwritten condition for rate hike, then it is clear that RBNZ cannot lift rates at the current circumstances.  

 

Already Loose: Rates May Be Unchanged

RBNZ's Survey of Expectations recorded a drop in expected inflation in two years from 2.06% ke 1.80%. However, although there is a drop, but teh survey indicated that repsondents does not see any reason for interest rates cut. Westpac argued that Monetary conditions are already perceived to be very loose, and GDP growth forecasts for the next two years were revised up slightly. Although there are concern about rising housing prices in New Zealand, but they predicted the RBNZ will seek macroprudential tools to address it, instead of changing interest rates this year.

Similar to Westpac, Prime Minister John Key also said to the media that RBNZ is probably looking for new tools to address the slow housing demand, because they should be unable to hike rates in the current low inflation situation. As well, 14 from 16 economists surveyed by Bloomberg predicted RBNZ will defend rates at 3.5%.

 

Following RBA: Probability Of Rate Cut

After Reserve Bank of Australia (RBA) cut rates last month, then it is possible that RBNZ will follow suit. That is why, although most economists tend to predict rates unchanged, but there are also those who thought they will probably hike rates as well. Financial Times mentioned that economists from TD Securities predicted RBNZ will cut 25 basis points, or lower rates to 3.25%.

TD Securities warned that keeping in mind the widespread deflation, if RBNZ insisted on defend rates at 3.5% then it will push New Zealand Dollars due to carry trade. On the other hand, RBNZ Governor Graeme Wheeler has stated that they wanted NZD to weaken. As we all know, currency exchange rates weakness potentially support a certain country's competitiveness; it is something that certainly beneficial for export-based country like New Zealand.

 

So, is RBNZ will cut rates, or keep it steady? If RBNZ keep rates unchanged at 3.5%, then it is possible for New Zealand Dollar to rebound from oversold area. But if RBNZ surprised the market with a rate cut, then the impact may kill other Comdoll along with it as cheap commodity prices have hit them too. The event presents one of the most key risks this week for Comdill, beside of other high impact events in the fundamental calendar such as unemployment report from Australia and Canada, and US retail sales.