Eurozone PMI numbers are the premier event risks this week for the forex market but the Reserve Bank of New Zealand’s monetary policy announcement is also important. On this quiet trading day, we want to take the opportunity to discuss what traders can expect from the RBNZ. Monetary policy decisions are always important but at time when the bias of central banks are diverging, interest rate decisions can affect currencies even when no changes are made. For New Zealand specifically, slower growth in Australia and China could have profound effects on the outlook for New Zealand but post earthquake reconstruction has provided underlying support for the economy. New Zealand is still recovering from the 2011 Christchurch earthquake and while the damage from this week’s earthquake was limited, it could impact the RBNZ’s rate decision.
The 6.5 magnitude tremor that was felt in the capitol of Wellington was stronger than the 6.3 magnitude Christchurch earthquake in February 2011 but thankfully no casualties were reported. After the 2011 earthquake initially hit, the RBNZ responded with a 50bp rate cut and the question now is whether the RBNZ feels that easing is necessary. When the central bank last met, they left interest rates unchanged at 2.5% and they cut their 2014 growth forecast from 3.3% to 3%. Since then, we have seen very little improvement in the economy.
The table below shows how the economy has performed since the June meeting. Consumer spending increased in June but confidence weakened significantly in the month of July. Job advertisements were flat, service sector activity slowed while manufacturing activity expanded. Business confidence ticked up and the housing market saw both improvement and deterioration. Unfortunately credit conditions may have tightened with interest rates on the rise. At the last meeting, the RBNZ expressed specific concerns about the level of the New Zealand dollar. Central Bank Governor Wheeler talked about how the currency is overvalued and warned of intervention but any currency intervention is expected to be covert because they are only looking to “take tops off dollar peaks where possible.”
While the slowdown in the region and the recent earthquake increases the risk of a rate cut by the RBNZ, we feel that the economy has not deteriorated enough to warrant easing. Therefore at most, we expect dovish comments from the central bank, which could still be enough to undermine the recovery in the NZD/USD.