Forex Investment and Currency Trading

Tonight is the Reserve Bank of New Zealand’s Official Cash Rate (OCR) decision. It being an OCR Review there will only be a statement issued to explain the rate decision but no update of the forecasts.
Market expectation is for a 50 basis point cut with a dovish statement. Central banks around the world are announcing their predilection towards holding rates lower for longer. Canada, the Riksbank and ECB officials have all made statements to this effect and we will look to see if the RBNZ follow this trend. Announcing a reluctance to raise rates in the future is a verbal [...]

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The NZ economy grew by an estimated 3% in the fiscal year ended March quarter 2008 (actual data reported June 27) but finished the fiscal year with a limp.
While the RBNZ left its key OCR at 8.25% in June, the accompanying decision and monetary policy statement (MPS) was much more dovish. As in the recent Financial Stability Report the central bank is worried about the future impact of the falling housing market on spending. It assumes a multi year 22% real depreciation of house prices (about half the real fall post the 1970s oil shock) and on that basis the [...]

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When the global financial turmoil started last July, the trade weighted NZD initially fell by 16% over the course of a few weeks, its plunge as a risk-sensitive currency then arrested by the Fed’s intra meeting discount rate cut in mid-August. Since then the trade weighted NZD has returned to a more stable relationship with its trade weighted 2-year yield spread until mid-April. In the four weeks since mid-April, the NZD TWI has continued to fall but yield support for the currency has dropped away even further. Yield spreads are back to the lows of last August whereas the NZD [...]

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In the previous two New Zealand recessions, falling house prices detracted significantly from annual CPI inflation. Today, the NZ housing market is already on the edge of deflation. House prices could fall as much as 30% from peak to trough. Even on conservative estimates, such a fall in house prices would knock more than 1 percentage point off annual CPI inflation and reinforces the view that the Reserve Bank of New Zealand (RBNZ) will be forced into easing rates sooner and more aggressively than the 90bps of cumulative cuts the NZ interest rate market is discounting over the next 12 months. [...]

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