RBNZ In Focus

With NZD/USD having recently risen to 5-month highs, tomorrow’s RBNZ meeting will be closely watched. The bank displayed a largely dovish tone last time around at the May meeting which took markets a little by surprise, given the recent jump in Q1 inflation. However, the bank opted to class the rise in CPI as mostly temporary and projected CPI to rise only gradually, with underlying inflation returning to their 2% target around H2 2019. Similarly, the bank forecasted for rates to remain on hold until 2019 also.

However, the bank opted to class the rise in CPI as mostly temporary and projected CPI to rise only gradually, with underlying inflation returning to their 2% target around H2 2019. Similarly, the bank forecasted for rates to remain on hold until 2019 also.

NZD Rally Defies RBNZ Once Again

The market reaction was initially bearish for NZD, though price quickly rebounded and since the meeting, we’ve seen a roughly 4% increase in New Zealand’s trade-weighted-index. The global environment has supported the resurgent NZD with weaker US bond yields and rising commodity prices combining to keep NZD bid, especially against AUD and CAD which have come under pressure over weaker commodity prices for their key exports.

This month’s meeting will not contain an update of the forecasts, and so provides only limited information, but traders will be keen to see if the bank continues its dovish tone, especially given rising commodity prices.

Mixed Data Since Last Meeting

In terms of data since the last meeting, business and consumer surveys have remained strong, while GDP was slightly below expectations in Q1, with annual growth moving to the low end of its five-year range.Notably, there has not been any fresh update on inflation, wages or employment readings.

The key element to this meeting will be how the RBNZ address the resurgence in the NZD exchange rate. The bank has regularly reaffirmed their judgement that NZD remains too strong and the recent rise will be disappointing.

The major difficulty for the RBNZ comes in actually affecting a lower currency as a decline in NZD requires an increase in its trading partner’s currencies. The RBA certainly do not look like they will be raising rates anytime soon and while the BOC has recently taken a more hawkish turn, it appears that the market is not yet convinced, given the currency reaction and a fresh decline in oil prices.

Technical Perspective

NZD/USD is currently stalled at bearish channel resistance and the January & March 2015 lows around .7240s. This is a key level for the pair, and a sustained breach here will pave the way for a run up to test the 2016 high a few figures above. To the downside, a retracement from here will bring the .7090 level into focus as the first key support.

AUD/NZD has reached an interesting crossroads. The bearish channel from year to date highs has taken the pair down to a test of the rising trend line support from last year’s lows, where price is currently stalled. To the topside, resistance is waiting at the 1/060 level which was the early-May swing low, with bearish trend line resistance is sitting also. To the downside, a break of the rising trend line will bring last year’s lows into focus.

Data Flash

Over an otherwise quiet data schedule, the main release was public sector net borrowing for the UK. The ONS-published data showed that government borrowing had fallen to its lowest level in 10 years over May, at £6.5 billion. This figure is sharply below analysts’ forecasts of £7.5 billion while net borrowing for the financial year so far had also fallen to its lowest level since 2008.

GBP/USD is now sitting on the short-term bearish channel support, just ahead of larger support at the rising trend line from 2016 lows. A break here will open up a test of the 1.24s support level.