Date: 12 Feb 2019

The Reserve Bank of New Zealand meets to decide on interest rates this Wednesday, with markets already pricing in a more dovish view from RBNZ officials. Last week the benchmark New Zealand 10-year government bond yield fell to a record low after the New Zealand economy reported much weaker-than-expected employment numbers during the last quarter of 2018.

The RBNZ is expected to join other central banks across the globe, who have recently started cutting growth and interest rate expectations this year. Market participants expect that the Reserve Bank’s monetary policy statement will communicate that the balance of risks for the New Zealand economy has tilted to the downside alongside interest rate expectations.

Economic data from New Zealand showed a marked deterioration during the last month of 2018, with retail sales, inflation and business confidence all tumbling, more worryingly for the RBNZ is the worse than expected jobs figures from last week, which showed the New Zealand economy adding jobs at its slowing pace since the first quarter of 2016.

The Reserve Bank of New Zealand has kept monetary policy unchanged since the end of 2016, maintaining the nations interest rate at 1.75 percent. At central bank’s last policy meeting RBNZ Governor Adrian Orr sent the New Zealand Dollar currency lower by stating that the central bank may indeed cut interest rates if needed.

Governor Orr also stated in November that the central bank expects that a rate increase may be appropriate during the third quarter of next year if the domestic economy continues to perform as policymakers forecast. Markets fear that the Reserve Bank of New Zealand will now take any future rate increase off the table on Wednesday and also talk down domestic inflation expectations now that the global economy is faltering and macro data points are turning south.

China is New Zealand’s second largest trading partner, with Australia the nations largest trading partner, while the United States is in third place in terms of trade. The central bank are likely to express concern not only towards the ongoing global slowdown but what effects the Sino-U.S trade war may have on its top-three trading partners.

 

NZD/USD Daily Candlestick Chart | Source: ActivTrader Platform

NZD/USD Daily Candlestick Chart | Source: ActivTrader Platform

 

The New Zealand Dollar weakened sharply lower against the greenback last week due to the poor fourth-quarter jobs reading and expectations of a significantly more dovish Reserve Bank of New Zealand monetary policy statement this week.

The NZD/USD pair is structurally weak while trading below the 0.6780 level, further downside towards the 0.6580 and 0.6490 levels may occur while below this key area. Key resistance for the NZD/USD pair above the 0.6780 level is currently found at the 0.6850 and 0.6940 levels.

 

Written by Nathan Batchelor, External Analyst

 

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