By Danica Hampton The RBNZ traversed the minefield well yesterday and in a well crafted statement engineered about as good an outcome as could have been expected under the circumstances. The NZD has eased somewhat on a trade weighted (TWI) basis and fixed interest markets are delaying the expected tightening schedule. The market was clearly surprised by the dovishness of the central bank but they probably shouldn't have been. There is a tendency, particularly in times of great uncertainty, to forget what the Reserve Bank's objective in setting monetary policy is "“ and that is to keep inflation within its target band. Given this, it is worth remembering that at the time of the June Monetary Policy Statement the RBNZ, as was the case this time around, stated "we expect to keep the OCR at or below the current level through until the latter part of 2010". Since June the major difference between the RBNZ's forecasts and the actual outcomes has been the ongoing strength in the NZD. What this implies is that forecast inflation must now be lower than what the RBNZ previously assumed meaning that it would need to be at least as dovish as it previously was.
International growth indicators have improved and domestically both confidence and housing market data continue to support our view that the economy is in the first stages of recovery. With this in mind the RBNZ left the clear message that if things stagger higher and the NZD holds it's own then it may be forced to ease again. "The forecast recovery is based on a further easing in financial conditions, if this easing does not occur, ("¦) we would reassess policy settings". We would pout the probability of a further easing at around 50%, we would put that probability even higher were it not for the fact that we still believe the NZ economy can continue along its recovery path even with a modest currency appreciation. Whether or not the RBNZ eventually ease is then a moot point but what is not doubted is that the cash rate is unlikely to rise for some time to come. Accordingly we stick with our view that it will be June 2010, at the earliest, before the cash rates move higher. There is no doubt that to create the perfect recovery, one which eats into the many imbalances that afflict NZ, we need a lower currency, stronger exports and ongoing constraint from the household sector. In reality, we suspect that the current recovery will be led by household spending and the NZD will again push higher. While the RBNZ will look to dictate the absolute level of monetary tightness, they will continue to be at the mercy of other economic entities as to the mix of those conditions. In a frenetic day locally and a busy overnight session the NZD/USD has held steady, for the most part trading close to our suggested support level of 0.6500/0.6525. The NZD has given up some ground on a TWI basis, most noticeably against the AUD where traders and analysts alike are trumpeting the contrast in commentary between the respective central bank Governor's, Bollard and Stevens. Next Tuesday's monthly RBA Board meeting is expected to conclude with the RBA moving to a neutral bias in their policy settings. Overnight trade has seen demand for the AUD come from both commercial and investment names, with some quasi-official and sovereign names noted in support at times. Robust equity markets with gains of around 1.5/2.0% have underpinned an improvement in risk appetite and a rebound in commodity prices. To round out the week we would look for support to continue to be evident ahead of the 0.6500 level in the first instance, with resistance seen at first towards 0.6560 though the real hurdle as previously noted is the 0.6625/0.6650 window. For the most part the USD is somewhat weaker overnight and once again sentiment is encouraged by news and data that support the view that the global recession is easing which dampens the safety demand for USD and Yen. Investment and sovereign names at times stand out as demand for currencies, with improved UK housing data and US Continuing Claims data colouring commentary. The number of continuing claims fell by 54,000 to 6.197 million in the week ended July 18 which is the lowest level since April. Also assisting sentiment was commentary from the People's Bank of China, who on their website stated they will maintain "moderately loose monetary policy" as they aim to consolidate the nations economic recovery. Commentary from the IMF was also noted as they urged authorities to maintain fiscal & monetary easings, as well as noting the EUR was in their view 0-15% overvalued. The week offshore concludes with tonight's release of Q2 GDP in the U.S, where analysts are forecasting a 1.5% contraction in the annual rate, following the Q1 drop of 5.5%.