Reserve Bank of New Zealand Amid Weaker Economic Activities

The Reserve Bank of New Zealand decision will be released in few hours, while the economic activities have weakened further compared with the data that was available for the bank during the previous decision.

At 09:00 GMT+, eyes will be on the Official Cash Rate, Followed by the Rate Statement and the Monetary Policy Statement, while the Press Conference will be held around 10:00 GMT+.

Market Expectations

The majority of economists are estimating no change in the official cash rate, which stands at 1.75. That which would be the fifth meeting where the bank will hold the rate steady at a record low.

However, the market is pricing in somewhat dovish tone, given the fact that the economic activities have weakened over the past few weeks, which might push the bank to react, whether in this meeting in the coming ones.

Health Of Consumer Data

Out of the four major health of consumer figures, two of which has weakened in June and July, including Credit Card Spending and the Consumer Confidence Index, which declined by 1.9% in July compared to +3.1% in June.

Weaker Labour Market

Employment Change in Q2 declined by -0.2%, which is the first QoQ decline since Q3 of 2015. The Participation Rate also slowed down to 70% down from 70.6%. Moreover, the Unemployment Rate ticked higher to 4.9%, which is the highest level since the beginning of this year.

Inflation Decreased Sharply

The latest inflation data showed that there is somewhat a disinflation risk, the CPI declined to 0% down from 1%, while the YoY slowed down to 1.7% down from 2.2% in one quarter. Global Dairy Trade Index, Food Prices, and ANZ Commodity Prices are also lower for the past few months.

Very Few Positive Signals

The Housing Market and the Market Indicators were the only positive signals if we compare the numbers from the last decision and today’s decision, including QV House Prices, Building Permits, 10 Yr Bond Yield which ticked higher to 2.83% and finally NZX50 which advanced all the way to 7782 up from 7586.

What Are The Options?

Amid a weaker economic activity in New Zealand, the Reserve Bank of New Zealand has many options in today’s meeting.

For the past few meetings, the Reserve Bank of New Zealand tried to put more pressure on NZD by intervening verbally through the bank’s statement. However, this has failed as the US Dollar weakness pushed NZDUSD to the highest level since May of 2015.

One of the options is to try this once again. In addition, the bank has more room to cut OCR rate by 25bps as inflation is slowing down and far from the RBNZ target. Therefore, a surprise is still there.

Where NZD Stands From All This

NZD USD 8 Aug 2017

As noted before, a dovish statement is more likely, given the fact that the economy has slowed down over the past few months. Therefore, a weaker NZD would be more likely.

A dovish tone means that the bank might keep the rates on hold, but may hint for further action in the future such as another rate hike soon.

This might be enough for the market to start pricing in such decision in advance, which should start today. If so, NZDUSD would break through the former solid resistance area which stands at 0.7320’s. The next immediate support stands around 0.72 followed by 0.7130’s which represents its 50 WEEK MA.

On the other hand, if the RBNZ failed to push NZDUSD lower, buyers are likely to try and push NZDUSD back to last week’s highs, but this time might push it well above 0.7550’s over the coming days.

Yet, what makes the downside move is more likely is that the Technical Indicators are heavily overbought on most time frames, including Daily, Weekly, and Monthly, crossing over to the downside once again, which call for a short and medium term retracement, to the downside.

By Nour Eldeen Al-Hammoury, Orbex

Nour Eldeen Al-Hammoury has more than ten years of experience in focusing on foreign exchange and global economic developments, as well as central bank policies and intermarket analysis (global markets relationships). Nour Eldeen is a regular on many major TV networks (several times each) such as: BBC Radio, BBC World News, Al-Jazeera, Al-Hurra TV CNBC Europe, CNBC Asia, CNBC Arabia, Al Arabiya, Bloomberg, Russia Today, Dubai TV, Sama Dubai, Skynews Arabia, Qatar TV and Future TV News.

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