As early as June the Reserve Bank of New Zealand (RBNZ) made it clear that it will cut the key rate one more time should NZD not depreciate. Kiwi remains fairly well bid despite the Fed’s upbeat assessment of the US economy and the weaker AUD. An OCR cut is all but fully priced in for August, but markets remain reluctant to get short.

As per the RBNZ's new economic assessment of 21st July, kiwi has eased a little compared with the highs in July but was 6 percent stronger than expected in June on a trade weighted basis. NZD/USD downside from highs of 0.7325 on July 12 has halted at 0.6951 levels and the pair is extending upside for a 3rd consecutive day. 

New Zealand inflation remains below the RBNZ’s target and has even disappointed to the downside in Q2 with 0.4 percent yoy. In its new economic assessment the RBNZ points out that the outlook for inflation has deteriorated since June and that “a decline in the exchange rate is needed”. 

The RBNZ will therefore once again lower its key rate in August. It may also want to change the loan-to-value restrictions (LVR) as from September 1 and standardise them nationwide. These restrictions are intended to reduce the risk of a housing bubble due to low interest rates, which is a major concern for the RBNZ.