A ‘no cut’ outcome at tomorrow's RBNZ review should result in a sharp knee-jerk bounce in the NZD despite fundamentals pointing lower

By Kymberly Martin

Most currencies were fairly range-bound overnight, although the CAD and NOK outperformed as the oil price pushed higher.

It was a relatively uneventful night as data failed to provide any significant surprises and there was a lack of inflammatory headlines from officials.

While equity market moves were unremarkable, the push higher in the global oil price was notable. The WTI price is currently up 3.10%, back at US$60/barrel.

This move appears to have assisted the performance of the ‘oil-linked’ CAD and NOK, which were the strongest performers over the past 24-hours. Both have gained around 0.6% relative to the USD.

The preliminary reading of Eurozone 1Q GDP was aligned with consensus expectations, at 0.4% q/q. The slight pick-up in growth appears driven by slightly stronger domestic demand. The 0.5% gain in household spending was the strongest since 4Q 2009 and investment also rose 0.8%. The EUR/USD has traded between 1.1220 and 1.1340 overnight, returning to 1.1290 currently.

The GBP experienced some choppy trading overnight, whilst showing little direct response to the release of UK trade data. From intra-night lows below 1.5260 the GBP/USD has rebounded to trade at 1.5380 currently.

NZD and AUD are both trading at similar levels to yesterday morning.

The NZD/USD touched lows around 0.7090 last evening before making an attempt to break through the 0.7180 level late last night. It now trades at 0.7140. With only NZ card spending data scheduled for release today the market will have its eyes firmly on tomorrow morning’s RBNZ meeting. With market pricing for a cut tomorrow still around 50/50, we expect NZD volatility whatever the outcome.

We continue to expect the RBNZ to maintain the OCR at 3.50%, at this meeting, though the prospects of a cut within the year ahead have certainly risen.

Given current NZD market positioning we expect a ‘no cut’ outcome tomorrow will result in a sharp knee-jerk bounce in the NZD.

However, the extent of any such move will be tempered if the Bank’s 90-day bank bill track is revised lower, to suggest rate cuts within the published forecast period.

We would use any rebound in the NZD/USD to reposition for a move down to 0.7000 by year-end. Fundamentals such as commodity prices and relative growth momentum continue to point to a lower NZD, in our view, even if there is no change to the cash rate.