RBNZ hold or fold and what it means for AUDNZD

This Wednesday, the RBNZ meets to discuss whether it will follow in the steps of the RBA and keep its official cash rate (OCR) on hold this month or cut rates by 25bp to 0.75%, taking its cumulative total of cuts in 2019 to 100bps.

In recent weeks the market has become more evenly divided on this matter. Reflecting this division, the New Zealand Institute of Economic Research (NZIER) Shadow Board which is independent of the RBNZ, voted on the weekend to keep the OCR on hold. Central to the Shadow Boards' decision was “renewed signs of housing market activity” and the financial stability risks of interest rates being set too low.

Stronger than expected September quarter inflation and the stimulatory effect of the NZ trade weight index (TWI) about 3-4% below the RBNZ’s own forecasts perhaps also played a part. Despite the rise in the Q3 unemployment rate to 4.2% last week, it is exactly where it started the year and also below the RBNZ’s forecast of 4.4%. 

Offsetting these positives, the outlook for global and domestic growth has weakened to the point the RBNZ is likely to follow the RBA and downgrade its September quarter GDP growth forecast (released December 19^th) as well as its GDP forecasts for the December quarter.

Taking into account all of the factors mentioned above and our thoughts penned recently in this article https://www.cityindex.com.au/market-analysis/central-banker-chit-chat-and-the-nzd/ our feeling is the RBNZ will elect to stay on hold on Wednesday to allow more time to asses the impact of its previous cuts.

Turning to the charts, evidence is building that AUDNZD completed a five-wave advance at last week’s 1.0865 high from the August 1.0264 low. Supporting the wave count is the bearish divergence as noted on the RSI indicator.

In a nutshell, we feel that the AUDNZD rally has extended far enough for now and there are some risks in holding AUDNZD longs into Wednesday’s RBNZ meeting. As such, we would prefer to go into the meeting flat the cross and looking for a pullback towards key Fibonacci support 1.0640/1.0570 as a possible area to re-open AUDNZD longs.

Source Tradingview. The figures stated areas of the 11th of November 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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