fxmatters

It has come round to the RBNZ’s turn now: the OCR will be cut on Thursday, and probably by 1%. This will not come as any surprise and hence not cause a large currency reaction but it probably keep a downward bias to the NZD/AUD this week.

Before then the latest CPI releases from NZ and Australia are due (see calendar). Both are likely to show annual inflation near 5%. But that should be the peak rate as the local recession and the likely global recession make it very difficult for those putting prices up to maintain sales (which ultimately ends in discounting). In other words, these releases are unlikely to deter the respective Reserve Banks from easing monetary policy further; a lower than expected figure may heighten rate cut anticipations.

The major uncertainty is still the global financial situation. There was a rebound last week – a case of very nervous and tentative buying in the major global markets. The S&P500 was up 4.6%. Consistent with recent trends, the AUD/USD was up 7.1% and the NZD/USD 3.0%. Remarkably the major exchange rate – the EUR/USD – was unchanged by week end.

With over US$3 trillion pledged by governments to support the financial system now, and with the US Fed likely to cut the cash rate again next week, the balance of risks appear biased towards the financial mood improving further this week. In contrast to the RBNZ driving force, such a development would push the NZD higher. Hence NZD weakness might be restricted to against the AUD near this RBNZ easing.