New Zealand DollarOutlook (1-3 Months)– RBNZ easing

The RBNZ released a paper on inflation in late May, and it was believeed to be another small step toward a policy rate cut. The interpretation of the paper was that non-tradable inflation is not the prohibitive factor in terms of rate cuts that the RBNZ had been suggesting it was. The market reaction was toward greater pricing for rate cuts from the Bank, and NZD/USD dipped to the lowest level since 2010. 

Analysts agrees that a policy rate cut is in the cards, and that it could come as soon as this month. They also think that further deterioration in economic conditions will warrant a second rate cut in Q3. In the wake of the paper on inflation drivers, there are now nearly two RBNZ cuts priced in the forward curve, which suggests only modest additional independent pressure on NZD in the case that these cuts are delivered.

"A June rate cut, however, would be sooner than the market is primed for, and would likely drive fresh cycle lows in NZD/USD in the very near-term. In the coming months, NZD/USD should see more pressure from a rate spread perspective with the help of the Fed likely hiking later this year. Generally speaking, we continue to foresee the profile for NZD/USD as a trend lower, driven especially by policy trends (RBNZ cutting while the Fed enters a hiking cycle)", says RBC Capital Markets. .