Rate cut tomorrow need not mean lower NZD
The change of mood argument I put forward a month ago has proven both right and wrong. It was clearly wrong about share prices. The equity rally at the time proved to be the classic false dawn that was followed by even more panic selling. If you fancy your chances of picking the US share market bottom – and hence the NZX bottom – you may find these articles of help:
- a tongue-in-cheek list of what has to happened first;
- a suggestion that the S&P500 Index would need to fall to around 400-500 using an approach of Benjamin Graham (the ‘father’ of value-investing);
- and an earlier article of a similar ilk, warning a single-digit P/E when using more realistic forward earnings implied a bottom around 450-500.
Where I was right, though, was that currencies are now moving differently. The currency carry-trades, such as the NZD/JPY, have broken the pattern of the previous five months and have not depreciated. In fact the NZD generally appreciated last week while the S&P500 dropped 7%. What is happening is that the major currencies have stalled. The trading patterns are broadly sideways. That will undoubtedly not last. I still put more probability on the eventual break of pattern being a weaker USD (and hence stronger NZD).
Meanwhile the key near-term factor is the RBNZ policy announcement tomorrow (Thur 9am NZ time). The RBNZ will drop the cash rate again. The market is pricing between a 0.5% and 0.75% cut. A 50 point cut appears the more likely to me. There has been a tendency for currencies to stabilise/rally after rate cuts recently (although the GBP is one exception) so it would not be surprising to see the NZD rally a little over the next week or two.
