The kiwi dollar has taken a bit of a hit on the charts over the last week as the market looks towards the RBNZ’s OCR decision tomorrow. Rates are not expected to be cut but the RBNZ will likely take the opportunity to talk the dollar down further.
The market has turned against kiwi dollar bulls recently as low inflation, poor Chinese data, dry local conditions, low export prices and potential restrictions to the housing market have resulted in a short term down trend. The kiwi had found the resistance at 0.76 tough to break as the market felt the kiwi was overbought. Further falls have come as the market eyes a slightly dovish RBNZ.
The Carry trade is still providing support, especially with Australia cutting interest rates, making the NZD more attractive, but the risks of a downturn in the New Zealand economy persist. Prime Minister John Key has even weighed in with his own thoughts that CPI will continue to fall in the months ahead. Further adding bearish pressure was an eco-terrorist threat to add the pesticide 1080 to infant formula, which could have detrimental effects on New Zealand’s milk exports.
Looking ahead to the Reserve Bank of New Zealand’s Official Cash Rate (OCR) decision tomorrow; it would be a big shock if the interest rate was cut. At this stage there is no pressing need for a cut with low inflation mainly resulting from falling oil prices, not a structural imbalance in the economy.
The RBNZ will, however, talk down the Kiwi dollar as it has done for many months. RBNZ Governor Graeme Wheeler is again likely to call the kiwi “unjustified” and “unsustainable” for as long as it remains over the 70 cent mark. He will only be happy when it hits the 65 cent mark and stays there.
Governor Wheeler is likely to expand on the macro-prudential restrictions to the investment property market, which could be viewed as a way to curb the housing market without raising interest rates. He is also likely to talk about the headwinds in the economy, especially the risks coming from overseas. He may even take a more dovish bias and could hint towards the possibility of an easing policy if the data requires it. But at this stage a cut is unlikely.
As for the kiwi dollar, it has fallen sharply on the expectation of a slightly dovish tone from the RBNZ. The market is pricing in a rate hold but could see further weakness if the RBNZ is more dovish than expected. A fall further on the charts will find support at 0.7212, with 0.7175 looking firm as the four year low and 0.7126 the next level down. A bullish move will likely find resistance at 0.7311, 0.7378 and 1.7441.