Investors were surprised when the Reserve Bank of New Zealand reduced the cash rate. However, the start of monetary expansion is not the only factor affecting the NZDUSD rate. Let’s delve into these and other factors that could hinder bullish sentiment and make a trading plan.
The article covers the following subjects:
Highlights and key points
- The Reserve Bank of New Zealand surprised NZDUSD traders.
- The pair is falling on expectations of aggressive monetary expansion.
- China and US stock indices are unlikely to support the kiwi.
- The NZDUSD rate may collapse to 0.595 and 0.586.
Monthly New Zealand dollar fundamental forecast
The Reserve Bank of New Zealand’s dovish turn was unexpected. The regulator reduced the cash rate by 25 basis points to 5.25% despite having indicated in May that it would raise the key rate and maintain a tight monetary policy stance until mid-2025. As anticipated, only nine of the 23 Bloomberg experts foresaw the commencement of monetary expansion in August. The majority of analysts had predicted a collapse of the NZDUSD exchange rate.
The unexpected change in direction by the RBNZ has come as a surprise to the markets. At a press conference, RBNZ Governor Adrian Orr stated that the central bank considered reducing the cash rate by either 25 or 50 basis points. He expressed confidence that inflation was back within the target band of 1-3%, which allowed the central bank to begin the monetary easing cycle. Consumer prices slowed to 3.3% in the second quarter, below the regulator’s forecast of 3.6%.
RBNZ cash rate and inflation in New Zealand
Source: Bloomberg.
The RBNZ anticipates further reductions in CPI growth rates to 2.3% by the end of 2024, below the previous projection of 2.9%. It forecasts that the cash rate will decline to 3.85% by the end of 2025, in line with the Bloomberg experts’ forecast of 3.75%. Futures markets are indicating a need for a key rate cut to 3% due to the high probability of a third recession in the New Zealand economy since 2022.
The rapid pace of monetary expansion is another acute headache the NZDUSD pair has to deal with. The New Zealand dollar has not received positive news from Asia for some time and is unlikely to do so shortly. In the second quarter, China experienced a record outflow of direct investment, reaching $15 billion, amid concerns about the future of the Chinese economy.
Direct investment flows to China
Source: Bloomberg.
The recent growth in exports has helped offset several issues facing the Chinese economy, including difficulties in the real estate sector, challenges at the local government level, and a slowdown in domestic demand. However, the economy’s focus on overseas shipments leaves it vulnerable to the potential impact of a new trade war with the US should Donald Trump take office. Pictet Asset Management estimates that the Republican candidate promised a 60% increase in import tariffs that could slam China’s GDP growth by 1.4 pp to 3.4% in 2025.
The outlook for the NZDUSD is not promising, particularly in light of the current state of the US stock market. Despite recent attempts at recovery, the S&P 500 is unlikely to reach its previous record highs. The heightened volatility is likely to result in the closure of carry trade transactions and exert pressure on the kiwi, reminiscent of Black Monday events.
Monthly NZDUSD trading plan
The prospect of a recession in New Zealand, the RBNZ’s aggressive monetary expansion, China’s economic challenges, and a decline in global risk appetite suggest that the NZDUSD pair will continue declining. In this connection, consider selling the pair with the targets at 0.595 and 0.586.
Price chart of NZDUSD in real time mode
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