NZD/USD continue to trend lower in July

The NZD/USD continue to trend lower in July, despite the NZD bears disappointed from an only 25bp rate cut of the RBNZ at its July meeting, which led to some short covering. The significant decline since April has led the NZD to depreciate 15% against the USD year-todate to 0.6555, and makes the once out of consensus forecast of 0.67 for year-end now seem a bit conservative. 

Despite the sharp decline in NZD/USD, the RBNZ still prefers NZD lower. In the July OCR decision, the RBNZ believes that further currency depreciation is necessary, albeit dropped the words "unjustifiable and unsustainable". But Governor Wheeler's speech strengthened the FX language further by saying that "a more substantial exchange rate depreciation will be required to stabilize the net external liabilities position relative to GDP". On monetary policy, the RBNZ maintained an explicit easing bias, but pushed back the idea of large declines in OCR rate over coming months. 

"Our economists believe that the next move of the RBNZ will be a 25bp rate cut in September, followed by a pause in October, and if the data continues to deteriorate they would put another rate cut of 25bp in for December," notes BofA Merrill Lynch.