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Kiwi suffers on uncertainty over future OCR increases

Kiwi suffers on uncertainty over future OCR increases.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

The NZ Dollar opens the week in consolidation phase around 0.8620 after losing close to two cents over the latter part of last week. RBNZ Governor Wheeler said in a speech last Wednesday that he believes the exchange rate is overvalued, but his threat of intervention was not the major catalyst for the sharp decline that followed, rather it was the acknowledgement that the high exchange rate and new economic data will reflect the extent and speed of any further OCR increases. The market is well aware that the central bank doesn’t have deep enough pockets to make intervention a viable proposition, but altering the OCR rate hike projections has far more impact.

The March MPS saw the RBNZ suggest 200 pts of tightening over two years was possible, now traders are beginning to factor in the possibility of a pause after just 50 pts of tightening. The MPS forecasts had the TWI at 78.4 in June, but it was close to 3 percent higher at 80.90 when Governor Wheeler spoke last week. We open the week with the TWI still two percent above forecast at 80.10, and if we remain at this level before the June MPS, the RBNZ may well choose to leave the OCR unchanged. The NZ Dollar should continue to find solid resistance at 0.8640, with a test of supports at 0.8545 and 0.8515 more likely in the week ahead. The RBNZ will be encouraged by further signs of a cooling housing market, with REINZ data released yesterday showing sales volumes slumped 20.2% in April against the same month last year, with the median price falling 1.8% over the past month. LVR restrictions are having a major effect, with sales in the sub $400K category falling 31.6% on a year ago. Contrary to the opinion of some analysts, RBNZ Deputy Governor Grant Spencer said in a speech last Thursday that while LVR restrictions are temporary, they are likely to remain until late in the year.

The NZD/AUD cross fell from highs of 0.9390 last week, and is currently finding support around 0.9200. Markets will watch the Australian budget Tuesday, and the NZ budget Thursday for direction on this cross, with a vast divergence expected from both budget releases. The Australian budget is likely to see a sharp tightening of fiscal policy as they seek to address the $50 bio blowout in their deficit, while the NZ budget on Thursday should see a modest return to surplus, with a more upbeat assessment of the economy. The US Dollar has strengthened over the past week as US economic data continues to point to a general improvement in their economy, and this USD strength will place further downward pressure on the NZ Dollar. While FED Chairman Yellen confirming that US rates will remain close to zero for a “considerable time”, she has described the tapering of the bond purchase programme as “appropriate” given the underlying strength in the domestic economy.


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