BOOM! – RBNZ Cuts 50bps

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Market Drivers August 7, 2019
RBNZ cuts by 50bps
German IP -1.5% vs. 0.5%
Nikkei -0.33% Dax 1.33%
UST 10Y 1.68%
Oil $53/bbl
Gold $1487/oz
BTCUSD $11600.

Europe and Asia:
RBNZ cut 50bp vs. 25bp

North America:
CAD Ivey PMI 8:30

The Reserve Bank of New Zealand shocked the market by cutting rate by 50bps rather than the forecast 25bps instantly sending the kiwi lower by one big figure as the currency dropped below the .6400 level before recovering slightly by mid-morning London trade.

Bucking the gradualist approach of other central banks, the RBNZ opted for larger cut and suggested that further cuts may be in store as the neutral interest rate has declined.

In its statement, the RBNZ noted, “GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets.

Global economic activity continues to weaken, easing demand for New Zealand’s goods and services. Heightened uncertainty and declining international trade have contributed to lower trading-partner growth. Central banks are easing monetary policy to support their economies. Global long-term interest rates have declined to historically low levels, consistent with low expected inflation and growth rates into the future.
Our actions today demonstrate our ongoing commitment to ensure inflation increases to the mid-point of the target range, and employment remains around its maximum sustainable level.”

The move was especially surprising given the strong New Zealand labor data just yesterday, but RBNZ is clearly trying to be proactive in making sure that monetary policy is supportive of growth going further. The central bank’s move puts enormous pressure on RBA to act in September with some analysts suggesting that the RBA may need to act just as aggressively with a 50bp cut.
This easing chain reaction from central banks is of course driven by the fact that President Trump has completely upended the global trading order and the future direction of the com dollars will very much depend on headlines coming from DC and Beijing. For now, both sides appear to have dug into their positions and the longer the standoff lasts the more damage it will do to global growth which in turn could trigger a vicious cycle of global equity selloff followed by a further selloff in comm dollars as investors assume an increasingly defensive risk-off posture.

For now the kiwi has found support at the .6400 level as markets digest the fresh news but the longer term trend of the currency could be towards the .6000 figure if trade tensions do not ease and global growth slows further.

Boris Schlossberg
Managing Director

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