More RBNZ easing in near term

The RBNZ cut the policy rate again in July (now 50bps this year). The case for easing developed in NZ through the first half of the year, and continues to justify more cuts in the coming months. The concerns primarily revolve around steadily weaker commodity prices of their main exports (especially milk, with prices down at every auction since March), an exchange rate that the Bank stillcharacterizes as overvalued, and inflation that remains very soft. 

"Again though, their work is not done yet, and now expect two more 25bp cuts this year, one in September and another in October. The dovish leaning message from the RBNZ now has a September rate cut almost fully priced in, and by the end of the year the forward curve has more than one cut priced. That suggests NZD may have limited independent downside even if the cuts we are expecting are delivered", says RBC capital markets. 

The RBNZ recognizes these pressures and their message has suggested further cuts are in the cards. On the currency, the Bank has reiterated that the high level ofNZD is a headwind to the economy, even after the depreciation in the aftermath of recent cuts.

"However, NZD/USD could continue to see pressure from a rate spread perspective with the help of the Fed likely hiking. Generally speaking, the profile for NZD/USD is continued to be foreseen as a trend lower, driven especially by policy divergence (RBNZ cutting while the Fed enters a hiking cycle)", added RBC.