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20 May 2015
NZD/USD outlook into RBNZ easing expectations – RBS
FXStreet (Barcelona) - Brian Mangwiro, Strategist at RBS, comments on the expectations surrounding a potential rate cut by the RBNZ and further gives the trading outlook for NZD/USD into the easing scenario.
Key Quotes
“Easing expectations rose significantly following a dovish Statement at the last policy meeting (April 29th). A slightly soft Q1 employment report, albeit due to rising participation rates on record immigration, also stoked rate cut forecasts.”
“Currently, markets are pricing in ~45% probability of a 25bp rate cut at the next policy meeting (June 10th) and a full cut is ~90% priced in for July.”
“On a cumulative basis, 45bp of easing is seen into Dec’15.”
“2yr inflation expectations edged up 5bp to 1.85%, and that seemed to weigh on dovish expectations, albeit smalls.”
“As we highlighted last week, New Zealand’s strong growth outlook and a very strong housing market suggests limited scope for policy easing. However, RBNZ can point to: (i) low inflation (last headline was only 0.1% y/y; and expectations 2yrs ahead are still sub-2%); and (ii) uncertainty around the size of the output gap to justify rate cuts. The Bank also believes inflation expectations can become backward looking, which could eventually weigh on wage growth.”
“NZD has inadvertently underperformed; falling ~5% vs. AUD and USD over the past two weeks. Risks are now skewed towards a sharp squeeze if RBNZ fails to match these dovish expectations.”
“If you believe that NZD is significantly over-valued and see prospects for 0.70, then ratio put spreads offer some decent leverage. Alternatively, the prospects of a RBNZ disappointment favours selling rallies on AUD/NZD close to 1.10 levels.”
“The current level of 1.07 is right at the 61.8% Fibonacci retracement level. In rates, if you expect RBNZ to deliver on cuts, then the sweet spot for carry on RECeivers is 1f 3y which rolls at ~6.3bp per quarter. Also, 1y1y/5y5y spread has some nice flattening momentum.”
Key Quotes
“Easing expectations rose significantly following a dovish Statement at the last policy meeting (April 29th). A slightly soft Q1 employment report, albeit due to rising participation rates on record immigration, also stoked rate cut forecasts.”
“Currently, markets are pricing in ~45% probability of a 25bp rate cut at the next policy meeting (June 10th) and a full cut is ~90% priced in for July.”
“On a cumulative basis, 45bp of easing is seen into Dec’15.”
“2yr inflation expectations edged up 5bp to 1.85%, and that seemed to weigh on dovish expectations, albeit smalls.”
“As we highlighted last week, New Zealand’s strong growth outlook and a very strong housing market suggests limited scope for policy easing. However, RBNZ can point to: (i) low inflation (last headline was only 0.1% y/y; and expectations 2yrs ahead are still sub-2%); and (ii) uncertainty around the size of the output gap to justify rate cuts. The Bank also believes inflation expectations can become backward looking, which could eventually weigh on wage growth.”
“NZD has inadvertently underperformed; falling ~5% vs. AUD and USD over the past two weeks. Risks are now skewed towards a sharp squeeze if RBNZ fails to match these dovish expectations.”
“If you believe that NZD is significantly over-valued and see prospects for 0.70, then ratio put spreads offer some decent leverage. Alternatively, the prospects of a RBNZ disappointment favours selling rallies on AUD/NZD close to 1.10 levels.”
“The current level of 1.07 is right at the 61.8% Fibonacci retracement level. In rates, if you expect RBNZ to deliver on cuts, then the sweet spot for carry on RECeivers is 1f 3y which rolls at ~6.3bp per quarter. Also, 1y1y/5y5y spread has some nice flattening momentum.”