Quick Recap
The RBNZ cuts rates this morning by 0.25% to 2%. In doing so it also said that it "further policy easing will be required to ensure that future inflation settles near the middle of the target range".
But the NZD/USD is up 1.2% since 7am this morning at 0.7278. Why that is so is easily understood. But the big question is what's next.
What You Need To Know
The RBNZ delivered on almost universal market expectation that it would cut rates at its August meeting and reduced the cash rate to 2% from 2.25% previously.
In his statement that accompanied the decision RBNZ governor Wheeler said that the global economy remained weak and noted that:
"Significant surplus capacity remains across many economies and, along with low commodity prices, is suppressing global inflation. Some central banks have eased policy further since the June Monetary Policy Statement, and long-term interest rates are at record lows."
In many ways this is where the battleground lies for the RBNZ and the New Zealand economy not at home.
I say that because governor Wheelers statement reads more like a statement that would accompany a decision to leave rates on hold, perhaps even one that is preparing the ground for a future rate hike.
The governor said "domestic growth is expected to remain supported by strong inward migration, construction activity, tourism, and accommodative monetary policy" while he also highlighted that "house price inflation remains excessive and has become more broad-based across the regions, adding to concerns about financial stability".
Hardly reasons to cut rates.
Buut the RBNZ is worried about the rally in the Kiwi with the governor noting:
"Weak global conditions and low interest rates relative to New Zealand are placing upward pressure on the New Zealand dollar exchange rate."
It's this, and low tradeables inflation which is holding back overall inflation which appears to have driven the cut.
Global forces remain the key and a problem for the RBNZ
Governor Wheeler and his colleagues at the RBNZ are but a tiny cork in the global economic ocean.
Nowhere is the point the governor made about global forces driving the Kiwi higher than in the breakdown in the relationship between the movements in the NZDUSD and the 90-day bill rate since the GFC kicked off in 2007.
What's clear is that global forces have to a large degree taken sway over the actions of the RBNZ given that interest rates in New Zealand are relatively high by global standards since then.
And it is perhaps the RBNZ's own forecasts of the 90-day bill rate plateauing at 1.8% which has outweighed its promise of further interest rate cuts.
That level is still high by global standards. Kiwi bonds continue to attract a similarly large spread over much of their developed world counterparts, many of which have negative or near zero interest yields at the moment.
So, along with a much better outlook for commodities from what was expected just a few months ago, and a relatively benign risk environment is it any wonder the Kiwi remains bid.
What about the technicals
Perhaps understanding all of the above at the press conference governor Wheeler said he wasn't surprised that the Kiwi dollar rallied after the announcement.
But many were and with the Kiwi now up at 73 cents the question of what's next is the big one.
Short term the rally in the Kiwi is running into the resistance zone of the uptrend channel that it has ben in since January's lows. That's when the Kiwi, and no doubt the RBNZ, was happily languishing in the mid 60 cent region against the US dollar.
This 0.7325/65 zone should continue to be solid resistance for the moment.
But of course, the outlook for the NZD by definition must include an assumption about the outlook for the US dollar. As discussed in Markets Morning earlier the US dollar found support last night. That double reinforces this overhead resistance.
Equally, I believe the market is under pricing the chance of a Fed rate hike this year.
So given the McKenna Mantra is respect trendlines unless or until they break I am happy to fade any strength in the Kiwi in front of this trendline.
If it breaks though there could be a run toward 0.7472 - but that is unlikely to last unless the US dollar is collapsing because the RBNZ will be quick to pull the trigger on more rate cuts to try and drag the Kiwi lower. Or at least slow its rise,
Have a great day's trading
Greg McKenna
Chief Market Strategist AxiTrader
www.gregmckenna.com.au
Please note: I usually look at 2 or 3 charts each day. These will not always be the same charts and the above is meant to help guide traders thought processes not offer advice.
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