Why The NZD Could Fall Over 100 Pips

Jarratt Davis

Special Consultant to the FPA
In this article, we will take a look at the week ahead. This will include this week’s main event – the RBNZ, and why we expect it to be NZD negative.

Last week, markets focused on escalating trade war tensions between the US and China. Following Trump warning of a further 10% tariffs worth $200bln, Danske Bank wrote that:

‘Trade war becomes a reality as Trump pushes further‘

Any further trade war developments will continue to grab the market’s attention. However, this week, markets will also focus on the RBNZ rate decision and GDP releases from the US, UK and Canada.

  • The RBNZ rate decision will be this week’s main event. This will be key for NZD’s fundamental bias, and we believe the bias is to the downside.
  • US and UK Final GDP announcements. The US’s and UK’s Final GDP announcements will confirm growth for Q1.
  • Canadian GDP. Canada will only be reporting growth for April; however, any deviation could still be tradable.
  • Eurozone Flash CPI. Inflation is the ECB’s primary focus; making EU CPI a key release for markets.
Wednesday, June 27
RBNZ Monetary Policy Decision – NZD
The first major event of the week and likely the highlight of the week will be the RBNZ’s June policy decision. At this meeting, the market widely expects the RBNZ to keep policy unchanged.

Following Q1 GDP last week, many analysts are expecting the RBNZ to lean to the dovish side for this meeting. If you missed New Zealand GDP last week, you can read our quick recap here.

ING‘s outlook is equally as bleak as our own, stating that ‘the impact on NZD should be neutral at best’. While ANZ notes that recent developments have been negative on balance.

With the market likely to position for a dovish RBNZ, NZD could even weaken into the RBNZ. If a dovish tone is then struck by the RBNZ, we would expect the bias for NZD to remain to the downside.

This means a NZD short heading into the RBNZ could be a great call. Especially if paired with a counterpart that has a particularly bullish sentiment bias.

We expect the NZDUSD pair to fall 100 pips to 0.6800 or even below in the event of the RBNZ being dovish.

Of course, if the RBNZ surprise markets, striking a more upbeat tone, NZD will likely strengthen. This would make for an excellent NZD long.

A key focus for the RBNZ’s June meeting will be any comments on inflation. As ANZ stated, they expect the RBNZ to ‘retain a message of caution until inflation shows consistent signs of life’.

Therefore, a more optimistic tone regarding inflation will be a very hawkish sign. Conversely, the market will consider a more cautious tone from the RBNZ to be dovish.

Thursday, June 28
US Final Gross Domestic Product – USD
This will be the third and final revision for Q1 GDP in the US. This is a key economic data point, indicating how much the US economy grew by in the first quarter of the year.

Market consensus is for GDP to remain unrevised from the Preliminary (2nd) estimate at 2.2%. This would confirm a slower rate of growth from Q4 2017’s 2.9% but still a reasonable rate for Q1.

Given the importance of GDP, a significant revision lower or higher will likely move USD. If revised lower, we would expect USD weakness and if higher, USD strength.

Although GDP is a significant event, further trade war developments could overshadow the release. Therefore, the ideal trade will see any sentiment from trade war developments support any deviation in GDP.

If any sentiment from trade war developments contrasts with sentiment from GDP, USD will likely trade mixed. In this scenario, there will likely be no clear opportunity.

Friday, June 29
UK Final Gross Domestic Product – GBP
Just like US Final GDP, the UK’s Final GDP release will be the UK’s third and final estimate for Q1 growth.

UK data over recent months has been relatively mixed. Therefore, key data points such as GDP will be highly influential to the market’s outlook.

The market expects UK Final GDP to remain unchanged from the second estimate at 1.2% Y/Y and 0.1% Q/Q.

Last week’s BoE meeting was overall hawkish with a surprise dissent from Haldane. Nevertheless, if data continues to disappoint, the outlook for GBP will become increasingly bleak.

For this reason, a revision lower could spark further doubt over the UK’s economic performance. This would likely weigh on GBP and even question the likelihood of an August hike.

Conversely, an upward revision could further support August rate hike expectations.

Therefore, a positive deviation could support GBP, providing an opportunity to go long. On the other hand, a negative deviation could weigh on GBP, providing an opportunity to go short.

It’s worth noting that Brexit developments have influenced GBP sentiment over recent weeks. Any significant Brexit announcements could overshadow UK Final GDP.

For this reason, any Brexit sentiment should support any deviation in GDP for the ideal trade. If sentiment surrounding Brexit contrasts with a deviation in GDP, there will likely be no clear opportunity.

Eurozone Flash CPI – EUR
Inflation in the Eurozone is the ECB’s primary focus. Therefore, as a measure of inflation, CPI will be key to the market’s fundamental outlook for EUR.

Market expectations are for Eurozone CPI to reach the ECB’s target of 2% in this release. From a fundamental perspective, this is a great sign that EUR’s bullish outlook remains intact.

Of course, recent sentiment has been notably bearish, and a miss from CPI could further weigh on EUR sentiment. On the other hand, a beat should help re-align EUR’s fundamental and sentiment bias’.

A beat in CPI should help support EUR, providing an opportunity to go long, especially if headline CPI exceeds 2%. Conversely, a miss will likely weigh on EUR, especially if CPI slows from May’s print of 1.9%.

Canadian GDP – CAD
Canadian GDP will be of less significance than the week’s earlier US and UK releases. This is because this GDP release will be for the month of April only.

Nevertheless, a significant deviation could still be market moving and provide an opportunity.

The market expects GDP for April to slow to 0.1% from March’s 0.3%. If GDP actually contracts, the report will likely weigh on CAD, providing a short opportunity.

Conversely, a beat on expects, especially if above March’s 0.3% will likely support CAD. This would provide a great opportunity to go long.

With rather bleak expectations for the RBNZ this week, we believe the bias for NZD is to the downside. Furthermore, beyond the RBNZ influencing NZD sentiment, the fundamental outlook seems increasingly uncertain.

The market continues to expect the RBNZ’s next move to be a hike. ANZ continues to expect the next move to be a hike in the second half of 2019.

However, this viewpoint may begin to change if the RBNZ become increasingly dovish and data continues to disappoint.

US and UK Final GDP for Q1, Canadian GDP for April and EU Flash CPI for June could also all provide great opportunities. However, we advise monitoring trade war developments for USD and Brexit developments for GBP too.

The goal of this report is to help you improve your understanding and ability to trade risk events. If you would like to learn more about risk event trading, please leave a comment below.