Opinion: RBNZ rate cut still on despite confidence rebound

By BNZ Currency Strategist Danica Hampton The NZD/USD has spent the past 24 hours consolidating within a 0.6940-0.7050 range. Yesterday’s NBNZ Business Survey showed a bit of a rebound from the very soft levels seen in July. Not only did headline confidence improve, but the own activity indicator series climbed to 4.7% from July’s -8.2%. Admittedly, the “recovery” has come from the softest patch the NBNZ survey has seen since its inception in 1988 and reflects at least in part a growing expectation further falls in both interest rates and the NZD. While yesterday’s data takes the risk of a 50bps cut in September off the table, we still look for the RBNZ to cut 25bps to 7.75% next month. Our central view sees the RBNZ cutting 25bps at each and every meeting until the OCR reaches 6.00% mid 2009 (and an eventual low of 5.50% by the end of it). However, if NZ data starts to suggest the economy is stabilising, the RBNZ may take a more measured approach to cutting interest rates. While the improving NBNZ Business Survey helped underpin NZD, it was really hawkish comments from ECB officials that propelled both EUR/USD and NZD/USD sharply higher overnight. ECB council member Weber said talk of an interest rate cut is “premature” and hinted that rate hikes could still be on the agenda if the Eurozone economy starts to improve. EUR/USD climbed from around 1.4680 to nearly 1.4780 and NZD/USD flirted with the 0.7050 region. However, NZD/USD was knocked from its highs after stronger than expected US durable goods data (printed at 1.3%m/m in July vs. flat forecasts) gave the USD a bit of a boost. For today, the global backdrop of a weaker USD should help underpin NZD/USD. We suspect dips will be limited to 0.6970-0.6980. Initial resistance is seen ahead of 0.7040-0.7050, but a break above this level could see the currency squeezed up towards 0.7100. The USD slipped lower against most of the major currencies last night thanks to hawkish ECB rhetoric and crude oil prices creeping higher. EUR/USD climbed from around 1.4680 to nearly 1.4780 last night after ECB council member Weber said talk of an interest rate cut is “premature”. Weber also hinted that should the economy start to improve there may be scope for further rate hikes. Comments from the ECB’s Papademos and Smaghi echoed Weber’s stance, noting the ECB’s "main and serious concern" was knock-on inflation pressures. Crude oil prices edged higher last night amid fears that Tropical Storm Gustav could interrupt oil and natural gas output in the Gulf of Mexico. Crude oil futures are up $2 to US$118.30/barrel. Solid demand for EUR/JPY, it climbed from nearly 160.00 to above 161.50, also helped underpin EUR/USD. It seems like the recovery in US equities (led by a recovery in financial stocks) and rebound in risk appetite provided a bit of a prop for both JPY crosses and USD/JPY last night. The S&P500 has climbed 0.8% and our risk appetite index is currently at 55% up from Monday’s low of 51%. However, EUR/USD was knocked from its highs after strong US durable goods data gave the USD a bit of a boost. Durable goods grew 1.3%m/m in July, well above forecasts for a flat outturn. EUR/USD slipped from around 1.4780 back below 1.4700. Looking ahead, we continue to think the ECB is being overly optimistic with regard to both growth in the Eurozone. The Eurozone economy is already halfway to a formal recession with a -0.2% q/q drop in GDP in Q2. Meanwhile, the more timely surveys of manufacturing and services activity reveal further weakness in July, while consumer confidence and spending continues to slow rapidly. We expect the ECB to downwardly revise its growth forecasts for the region when its September forecasts are published. Nonetheless, inflation is a real concern for policymakers and consequently we are unlikely to see European interest rates cuts until 2009. While many investors are now hoping for a bounce in order to establish short EUR positions, or buy forward USD, we suspect 1.5000 will be a struggle in the absence of a further stock market plunge or a disastrous US non-farm payrolls number (due September 5). * Danica Hampton is BNZ’s Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.