The central bank cut rates by 25 basis points, but this was fully in the price. In fact, the market had priced in a small probability of a 50 basis point cut, so this was clearly an exercise in understanding positioning and market expectations.
One of the key points has been a slight change in the language around the currency, which isn’t necessarily a surprise, given Prime Minister John Key’s recent comments and the 12% decline in the trade-weighted NZD since April. The central bank toned down its view around its desire for further weakness, removing the reference to the ‘unjustified’ levels and merely stating ‘further deprecation is necessary given the weakness in export commodity prices’.
Looking forward, the RBNZ suggested some further easing ‘seems likely’ and this is in-line with economists, with most expecting another cut in the September meeting and then another before year end. Traders will therefore need to watch milk prices, inflation expectations (released 25 August) and Q2 terms of trade data (1 September) as well, but if further falls are seen in the key commodity complex then the RBNZ will act but I struggle to see a cash rate below 2.5% by year-end.
Technically NZD/USD is in a text book downtrend and the 20-day moving average (currently NZD$0.6654) has contained the rallies since May. Therefore, it will be interesting to see how the pair reacts if we see a move into this short-term average. Downtrend resistance is subsequently seen at NZD$0.6750, with the 9 June high of NZD$0.6771 also in play.
As always I feel the trend needs to be respected, but I see better ‘value’ in looking at shorts into the 67 handle, cutting back on a daily close above the 9 June high and April downtrend.