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RBNZ Official Cash Rate (OCR): What to Expect for NZDUSD

On September 25, the Reserve Bank of New Zealand (RBNZ) will make its Official Cash Rate (OCR) public at 2am GMT. The market consensus is for the bank to leave the OCR unchanged at 1.00%.

Markets have priced in this figure. The big question is whether the RBNZ will follow up this action with a rate cut further down the road. That is why traders will closely watch the wording of the accompanying statement from the Reserve Bank of New Zealand. Traders will be looking for clues to suggest a resumption of the easing cycle down the road. If this happens to be the case, the RBNZ statement will most likelyconvey this in a veiled manner and not in an overt declaration.

Despite a recovery in commercial and home construction, the economy of New Zealand has slowed overall. Apart from the drop in the quarterly GDP (0.5% for Q2 2019 as against the Q1 figure of 0.6%), annualized growth has also slowed to its lowest levels in 8 years.

Reconstruction work on earthquake-hit areas is also coming to an end, and the housing market has also seen a dampening. Migration rates and population growth have also dropped off. Business confidence has also taken a hit, and as companies begin to hold back on expansion, it is limiting the number of new jobs being added to the economy.

However, consumer spending is up, helped by an increase in salaries of public workers. This has not produced the desired economic growth. The RBNZ may therefore see its hand being forced down the road to continue to ease rates, even if just to stimulate borrowing and economic activity.

At 50bps, the last rate cut was quite aggressive. With the latest GDP figures already in line with the bank’s predictions, the Reserve Bank of New Zealand may therefore decide to adopt a “wait and see” attitude. This may reflect in its September’s OCR rate stance.

However, if things continue to go south and the global economic slowdown continues to pose downside risks for the New Zealand economy, the RBNZ may be forced to act in November. Only yesterday, Chinese Premier Xi Xinping made a side comment while speaking on the Saudi Aramco attacks, saying that an increase in oil prices could not be afforded at this time when the global economy was slowing. Comments like this from the largest consumer of commodity products from the Australian and New Zealand economies cannot be ignored.

If the RBNZ holds its Official Cash Rate at 1.00%, but gives even the slightest hint of a further rate cut, the NZDUSD may see further downside. A rate cut by 25bps would definitely see a selloff in the NZDUSD as this would surprise the market. A hold at 1.00% with a statement that does not show commitment to rate cuts may see the NZDUSD gain to levels where traders may put it under bearish pressure once more.