RBNZ Preview: Dovish forward guidance to down the Kiwi?

The Reserve Bank of New Zealand to leave policy steady at its September meeting.
Dovish forward guidance could weigh on Kiwi, but dollar mood to dominate
Eyes on hints about QE expansion or negative rates, as the economic situation improves.

Dhwani Mehta FXStreet

With the coronavirus restrictions lifted for most of New Zealand (NZ), lower unemployment rate forecast and less-severe-than expected economic slump, the Reserve Bank of New Zealand (RBNZ) is expected to keep the Official Cash Rate (OCR) unchanged at a record low of 0.25% for the fourth straight month in September.

The Kiwi central bank expanded the Large-Scale Asset Purchase (LSAP) program to NZ$100 billion in August, insisting that “a package of additional monetary instruments must remain in active preparation.”

On Monday, the country re-opened after the strict restrictions re-imposed by NZ Prime Minister (PM) Jacinda Ardern to contain the coronavirus spread. However, Auckland will move to alert level 2 this Thursday. The South Pacific island nation has about 60 active virus cases, at the moment.

Ahead of the October 17 general election, New Zealand’s economy appears relatively stronger, having witnessed a shallower recession in the second quarter. The NZ Q2 GDP contracted a 12.2% QoQ versus -12.8% forecast.

Meanwhile, the Treasury Department’s pre-election Economic and Fiscal Update (PREFU) projected the unemployment rate to peak at 7.8%, down from a 9.8% forecast in the budget.

Dovish stance to persist despite strong fundamentals

The strong fundamentals could prompt the RBNZ to stand pat on its monetary policy settings on Wednesday but Governor Adrian Orr and company could reinforce the dovish stance amid looming concerns over the longer-term economic impact of the coronavirus pandemic.

The policy statement could reiterate the central bank’s willingness to adopt negative interest rates and even monetary financing of the government. However, the odds of the RBNZ deploying non-conventional policy measures remain lower, as the New Zealand Institute of Economic Research (NZIER) Monetary Policy Shadow Board continues to favor the expansion of the quantitative easing (QE) program than a negative OCR to stimulate the economy.

The minutes of the policy meeting could continue to show the board’s commitment towards supporting the economic recovery with all available policy tools. However, its take on the exchange rate value will be closely eyed after the Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle outlined currency intervention as one of the four policy options on Tuesday.

Any hints on the adoption of the negative interest rates as a policy option and/ or verbal intervention could exacerbate the pain in NZD/USD. The kiwi dropped nearly 120-pips to the lowest level in five-week near mid-0.66s on Monday, courtesy of the sell-off in risk assets and a surge in the US dollar demand, as a safe-haven. The dollar bulls were powered by the mounting risks over the coronavirus resurgence in Europe and the US Federal Reserve’s (Fed) reluctance to additional stimulus.

Therefore, the risk tone and the resultant sentiment around the US dollar could likely influence the NZD/USD reaction to the RBNZ's decision. Although the bias appears to the downside amid an expected dovish forward guidance.

More NZD/USD Price Analysis: Double top on the daily chart

Premium

You have reached your limit of 3 free articles for this month.

Start your subscription and get access to all our original articles.

Subscribe to Premium Sign In

Author

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

EUR/USD holds firm above 1.1900 as US NFP looms

EUR/USD holds its upbeat momentum above 1.1900 in the European trading hours on Wednesday, helped by a broadly weaker US Dollar. Markets could turn cautious later in the day as the delayed US employment report for January will takes center stage.

GBP/USD remains above nine-day EMA near 1.3650

GBP/USD recovers its recent losses from the previous session, trading around 1.3680 during the European hours on Wednesday. The technical analysis of the daily chart indicates a sustained bullish bias, as the pair trades within an ascending channel pattern.

Gold sticks to gains near $5,050 as focus shifts to US NFP

Gold holds moderate gains near the $5,050 level in the European session on Wednesday, reversing a part of the previous day's modest losses amid dovish US Federal Reserve-inspired US Dollar weakness. This, in turn, is seen as a key factor acting as a tailwind for the non-yielding yellow metal ahead of the critical US NFP release.

US Nonfarm Payrolls expected to show modest job gains in January

The United States Bureau of Labor Statistics will release the delayed Nonfarm Payrolls data for January on Wednesday at 13:30 GMT. Investors expect NFP to rise by 70K following the 50K increase recorded in December.

S&P 500 at 7,000 is a valuation test, not a liquidity problem

The rebound from last week’s drawdown never quite shook the sense that it was being supported by borrowed conviction. The S&P 500 once again tested near the 7,000 level (6,986 as the high watermark) and failed, despite a macro backdrop that would normally be interpreted as supportive of risk.

Bitcoin price slips below $67,000 ahead of US Nonfarm Payrolls data

Bitcoin price extends losses, and trades below the lower consolidating boundary at $67,300 at the time of writing. A firm close below this level could trigger a deeper correction for BTC. Despite the weakness in price action, institutional demand shows signs of support, recording mild inflows in ETFs so far this week.