RBNZ find themselves in a renewed tricky spot; Whilst fundamentals have improved they still have an irritatingly high currency at a time when select trade partners appear on the brink of further depreciation.
Electronic card retail sales expanded 1.1% in April compared with -0.3% prior, whilst expanded a respectable 4.5% YoY versus 5.6% prior. These numbers are the envy of the Australia who printed a mere 2.1% YoY this week, having been on a steady decline since the 6% peak in 2015. However, whilst the data is strong on the face of it we have noticed the cyclical tendency which suggests it too may have topped I H2 2016 and suggests several more months of a gradual decline. In addition, each cycle since 2011 has moved gradually lower which backs up our observations that the PMI data (business survey’s) whilst still respectable, are not quite what they were 2 years ago.
RBNZ hold their monetary policy meeting tomorrow where the overwhelming consensus is for them to remain on hold for the next 12 months. We also share this view as some of the more worrisome data has begun to pick up since their last cut, namely the consumer price indices. Tradable inflation managed to pull itself out of a multi-year contraction to achieve 1% QoQ, and headline CPI has moved about their 2% target at 2.2%. RBNZ did point out that they expect it to soften slightly but at last inflation is moving in the correct direction for an inflation targeting bank.
Whilst we expect them to hold tomorrow, it will not remove the easing bias as their currency remain historically high. The TWI’s 4% decline since Feb keeps it at historically high levels and their statement has repeatedly reminded us that ‘further deprecation’ is needed. Whilst the Fed rising could help this, their trade partners also need to have stringer currencies for their trade weighted index to move lower. This is where it becomes problematic for RBNZ as it now looks like AUD is in for a rough ride in H2 this year. As Australia remain their key trade partner, a lower AUD provides more support for the NZ TWI, as does a higher USD.
Summary of the April statement
- OCR left unchanged at 1.75%
- TWI has fallen by 4% since beginning of Feb, but further depreciation is needed
- House price inflation has moderate
- Headline inflation has returned to the target band, but is expected to return to the midpoint of the target band over the medium term
- Headline CPI will be variable over the next 12 months
- Monetary policy will remain accommodative for a considerable period
- Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly
We had conceded defeat on the call for AUDNZD to eventually move beyond 1.10 and head for 1.12-1.13. Recent price action appears to be impulsive and has seen an intraday break of the 1.0642 swing low. However, as several technical levels (including the swing low) are currently supportive, then we are on guard for a bounce higher from current levels. In many ways, we would prefer this as it could allow us to seek bearish positions with potential for a higher reward/risk potential, assuming we do see it eventually break to the downside. We are slightly confident of an eventual downside break because the decline from the 1.0943 high has only provided very small pullbacks, which favours a larger impulsive wave.
For those seeking to capitalise on NZD weakness then GBPNZD appears to be forming a bullish triangle. The trend has lost a little steam yet we remain above the 50 eMA and currently sitting on the weekly pivot. If you consider 1.090-9045 resistance and can manage reward/risk adequately, then it may be a higher probability bullish trade to sort NZD against.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.