The New Zealand and Australian Dollars are trading lower early Thursday with the Kiwi leading the way due to a dovish outlook from the Reserve Bank of New Zealand.
At 0134 GMT, the NZD/USD is trading .6712, down 0.0036 or -0.54% and the AUD/USD is at .7431, down 0.0003 or -0.03%.
The New Zealand Dollar is under pressure early Thursday after the Reserve Bank signaled it will leave the official cash rate (OCR) unchanged until at least 2020, as concerns around the economy build.
The RBNZ left its benchmark interest rate unchanged as widely expected by economists and traders, however, it was the bank’s guidance calling for low rates for considerably longer than most forecasters were predicting, that is driving the Kiwi lower.
“We expect to keep the OCR at this through 2019 and into 2020, lower than we projected in our May Statement,” Governor Adrian Orr said in the opening lines of the statement.
“The direction of our next OCR move could be up or down.”
Orr also commented that the economy was expected to pick up pace before the end of the year, but there were risks that this may not happen. In the Reserve Bank’s latest forecasts, the economy is expected to grow by about 2.8 percent over the coming year, 0.5 percentage points lower than it expected at its last major update in May.
The RBNZ forecasts also call for lower growth in the next nine months before forecasting the economy will pick up in 2019.
“Risks remain to our central forecast. The recent moderation in growth could last longer,” Orr said.
“Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressure can pass through into higher prices and impact inflation expectations.”
The early weakness suggests investors were caught by surprise by the negative reaction from the RBNZ since May. Although economic growth had slowed since then, some economists don’t think that it will remain as soft over the rest of this year as the Reserve Bank expects. They base this assessment on strong economic data in June.
ASB chief economist Nick Tuffley said his forecasts were for stronger inflation than the Reserve Bank’s, as well as stronger growth forecasts and as a result was forecasting the OCR would begin to rise in late 2019.
However, Tuffley conceded that in terms of growth forecasts there was “a greater degree of uncertainty than usual given the persistent weakness in business confidence to date this year”.
Unless there is a dramatic reversal bottom, the NZD/USD is poised to challenge its early July bottom at .6688. The AUD/USD, on the other hand, is currently in a position to breakout over a pair of minor tops at .7440 and .7442. This move will shift momentum to the upside and put the Forex pair in a position to challenge the late June main top at .7465.
As far as the Aussie is concerned, look for an upside bias as long as the market remains over .7397. A downside bias could develop if this price fails as support.