The New Zealand dollar is going through hard times. It is currently in a gloomy state due to RNBZ's intentions to lower the interest rate – some say to zero, while other data expects it to be in the negative zone. Therefore, we should treat any upward impulse of the NZD/USD pair very carefully, since NZD is a fragile currency who can't do things on its own. Any comments or rumors about the prospects for monetary policy will turn out badly regardless of USD dynamics.
For example, the NZD/USD pair updated a week and a half low, reaching the level of 0.6540 during the Asian session. Against this background, traders reacted to the information published by Reuters, which comes down to the fact that the RBNZ members are seriously considering the option of reducing the rate to the negative area at the next meetings. It should be noted that the rate is at the level of 0.25% at the moment, and rumors about lowering this value to zero have been discussed in the market since RBNZ's last meeting. At the same time, many experts discussed the option of going into a negative zone, although this was not considered earlier. However, the concept now is gradually but surely changing towards a more "dovish" option – both analysts and informed sources of journalists are increasingly talking about a negative rate.
According to Reuters, the New Zealand regulator is now actively working on the option of reducing the rate to the zero level (down to -0.25%) as well as over incentive programs. This information is consistent with both the latest macroeconomic reports and statements from RBNZ representatives.
So, at the end of the third quarter, New Zealand's inflation rate collapsed into a negative zone (on a quarterly basis) for the first time since January 2016, reaching -0.5%. In annual terms, the situation is not better: after two months of growth, the indicator slowed again to 1.5%. New Zealand's GDP in the second quarter collapsed by 12.2% compared to the previous three months (this is a record decline). In particular, consumer spending fell by 12%, the construction industry by 25%, and the manufacturing industry by 13%.
At its last meeting, the New Zealand Central Bank declared its intention to maintain rates at the same level at least until March next year. However, the latest signals indicate that the Central Bank is gradually preparing the ground for a rate cut ahead of schedule. In particular, RBNZ chief economist, Yuong Ha said that the regulator needs to be more aggressive with stimulus, since it is better to start too early than to miss the ideal moment. At the same time, he called low rates an effective means of fighting the coronavirus crisis. Another member of the New Zealand regulator, Christian Hawkesby, also called for an interest rate cut. He said that inflation will remain below the target level adding that over the next three years.
It is also worth recalling that the RBNZ can make surprises. So, this quality does not characterize the Central Bank on the positive side: a weak level of communication with the market is filled with sad consequences. We can note the events last Summer when the RBNZ cut the rate by 50 pips at once without any clear warning. This decision was felt far beyond the borders of New Zealand – many experts then suggested that the Central Banks of other leading countries would follow this example and resort to aggressive monetary easing measures.
It seems that New Zealand's regulator has learned a lesson from last year's situation. At the moment, the RNBZ is gradually but consistently preparing the markets for the fact that the Central Bank will cut rates at one of the next meetings.
RBNZ will hold another meeting on November 11, followed by the next meeting in February 2021. Therefore, experts' opinions were divided. According to some analysts, the regulator will decide to take active steps at the next meeting, while others are confident that the Central Bank will maintain a wait-and-see position until February. In my opinion, the option to lower rates by November should be considered as the main one, considering the rumors from insiders and comments of the RBNZ members.
The fundamental outlook for the NZD is disappointing; therefore, the price of NZD/USD is expected to decline in the medium and long term. Due to this, short positions are in priority. Technically, the pair on the daily chart is below the Kumo cloud and between the middle and lower lines of the Bollinger Bands indicator. At the moment, the NZD is demonstrating corrective growth, which can be used as an excuse to enter sales. The main goal is the level of 0.6500, which corresponds to the lower line of the Bollinger Bands indicator on D1.
