Shaky times for Kiwi ahead of rates decision

 
Philip Salter
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ON 22 February an earthquake with a magnitude of 6.3 hit the South Island of New Zealand, devastating persons and property in the city of Christchurch. In consequence, the Kiwi slid against the US dollar. Prior to the quake the Reserve Bank of New Zealand (RBNZ) was largely expected to sail a steady course, holding rates at 3 per cent for the medium term. Post-shock, a cut is on the cards and Thursday’s meeting of the RBNZ has become the main event for forex traders.

There are as many opinions as there are people commenting on whether, and by how much, the RBNZ will cut. Expectations range from no change to a cut of 50 basis points. Angus Campbell of London Capital Group suggests that “considering that inflation globally is on the rise, it’s unlikely that we’ll see a move from their central bank to cut rates at the next meeting,” but he adds that “the decision is expected to be on a knife edge.”

Michael Hewson of CMC Markets, however, suggests that “25 basis points are priced in, so “we could well see a bounce in the Kiwi.” Although “the RBNZ is expected to cut by 25 basis points” says Rishi Patel of FairFX “we cannot rule out a 50 basis point cut.” George Tchetvertakov at Alpari UK thinks we will probably see “a 25 basis point cut, although a significant amount of market participants are expecting a 50 basis point cut”.

“The battle of the high yielders” between the Australian and New Zealand dollars has been interesting for Campbell “since the Australian dollar-New Zealand dollar broke out above resistance at $1.3200.” Hewson suggests “the New Zealand dollar may well have been overdone, hence the current rebound against the US dollar from levels last seen in October last year.”

With an eye to the future Hewson suggests that “any downgrading of the fiscal outlook could also impact risk appetite and increasing oil prices will be a factor in that assessment.” For Campbell, the recent spike in oil prices is encouraging “investors to exit riskier currencies such as the New Zealand dollar, back into safer havens like the swissie or greenback.”

As the economic aftershocks from the earthquake subside, traders are getting back to fundamentals, but uncertainty hangs over these Pacific islands. Patel points to a recent business survey from the Bank of New Zealand indicating that sentiment has fallen by 43 points to a 2 year low of -21 points. Yet “long-term damage will be minimal and manageable for a country of New Zealand’s wealth and economic position” says Tchetvertakov. Uncertain times indeed, but potentially profitable if you can pick where the Kiwi is heading.