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In the world of mankind, there will not be a statement without any position, nor a remark without any purpose.
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Money makes the world go round and currency is a permanent commodity. The forex market is full of surprises and expectations.
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The RBNZ cut the OCR by 50bps to 4.25% at its final policy meeting for this year.
As widely expected, the RBNZ cut the OCR by 50bps to 4.25%. The decision was reached by consensus and so no vote was taken.
The RBNZ’s projected track for the OCR was revised lower over 2025 but higher in 2026 from that seen in the August MPS.
The projected average OCR in Q4 2025 was revised down 30bps to 3.55%. This is consistent with around 75bps of cuts in 2025 that the Governor noted would likely be largely frontloaded into the February 2025 meeting.
The projected OCR for Q4 2026 was revised up 4bps to 3.17%, implying perhaps 1-2 25bps rate cuts in 2026.
The RBNZ assumes the OCR reaches around 3.06% in Q4 2027 (the final quarter of the forecast).
According to the RBNZ, the most important driver of today’s decision was that inflation remains well-contained and the economy has significant excess capacity. Hence there remains scope to continue cutting the OCR towards the neutral zone.
The RBNZ seems interested in continuing to frontload cuts to get to the neutral zone. That looks like a decent chance of a 50bps cut in February and then just one more 25bp cut in 2025 – all going according to forecast. From then, the OCR profile flattens out noticeably and seems consistent with the idea that the easing cycle will be to all intents and purposes complete by mid-2025. We don’t see much here that is consistent with the more dovish views of global investors we noted in our recent Client Pulse survey.
The RBNZ continues to emphasize the data dependence of future OCR moves. Either a 25bps or 50bps easing could occur in February depending on the performance of the economy.
The RBNZ singled out two key uncertainties regarding the near-term outlook – one concerning the persistence of some components of inflation where pricing behaviour is yet to normalise, and the other concerning the speed and timing of the recovery of growth in response to lower interest rates. The RBNZ also notes the possibility of greater inflation volatility over the medium term, reflecting geopolitical risks and climate-related energy and food risks. Other specific economic assumptions that are subject to uncertainty include the outlook for migrant inflows (and their impact) and the extent to which government spending evolves in a way that is consistent with the forecasts in Budget 2024 – the latter perhaps a warning shot to the Government as it begins to consider the fiscal strategy that will underpin Budget 2025.
Given the Governor indicated that he saw a high chance the OCR would be cut by another 50bp at the February MPS we would concur this is more likely than not. Our forecasts of the key data between now and the February MPS are not very different to the RBNZ’s – hence it’s hard to hang our hats on any specific piece of data that might move the RBNZ back to a 25bp move.
After that the outlook is murkier. We didn’t see anything today that suggests our view of the economy is different. Hence a 3.5% trough in the OCR mid-year still looks appropriate. We think that last 25bp cut will come at the May MPS. A skip in the April review seems consistent with the neutral zone getting very close and we do expect some very tangible signs of strength in the housing market by then. It should also be evident that the peak in the Unemployment rate will be near by April based on business surveys and strengthening consumer confidence.
The RBNZ’s updated forecasts show inflation sitting just above 2% for most of the projection period. Their longer-term inflation forecast is just slightly higher than they previously assumed, with domestic (non-tradables) inflation now expected to ease more gradually than the RBNZ assumed in August.
The upwards revision to the RBNZ’s forecasts for domestic inflation is consistent with their updated thinking on the economy’s productive capacity. As discussed below, the RBNZ now estimates that the economy’s rate of potential growth is lower than previously assumed, so there will be less spare capacity in the coming years than they had thought.
We agree with the RBNZ’s updated thinking on domestic inflation. Domestic inflation has consistently surprised to the upside of the RBNZ’s forecasts over the past two years. While inflation in interest rate-sensitive areas of the economy is cooling (like in the hospitality sector), we’re still seeing strong price increases in less interest rate-sensitive areas, like council rates and insurance premiums. That means total non-tradables inflation is only returning to average rates gradually. The RBNZ’s forecast for non-tradables inflation are now close to our own.
Despite the lingering firmness in domestic inflation, we still see downside risk to the RBNZ’s overall inflation forecasts as a result of weak imported prices (aka tradables inflation). Imported prices have been much weaker than the RBNZ assumed over the past year and have more than offset the persistence in domestic inflation. While the RBNZ expects inflation in these areas will lift relatively quickly over the year ahead, we think import prices will remain soggy for a while yet.
As a result, we think it’s likely that overall inflation will dip briefly below 2% in 2025. However, the undershoot of the target midpoint is likely to be temporary and modest and won’t alarm the RBNZ too much. Importantly, this is an area where the uncertain global backdrop will be crucial. Concerns about trade restrictions in the US have already pushed the NZD down in recent weeks, and that could limit or offset the falls in imported inflation that we’ve seen over the past year.
Compared to August, the RBNZ is actually slightly more confident about a pickup in economic activity in the near term, lifting its forecast for December quarter GDP growth from +0.1% to +0.3%. Beyond that, though, the RBNZ has substantially revised down its estimates of both actual and potential output over the coming years. It now expects GDP growth of 2.3%y/y for December 2025, compared to 3.3%y/y in the August statement.
The RBNZ’s growth forecasts are very similar to our own for 2025 (we are slightly more optimistic about 2026).
This downgrade of the economy’s growth potential was driven by a few factors. First, the RBNZ has assumed that New Zealand’s poor productivity growth performance in recent years will continue. Second, the RBNZ now sees a stronger link between population growth and potential GDP growth – which amplifies the effects of a downward revision to its net migration forecasts for the next few years.
Notably, Stats NZ today foreshadowed that there will be an upward revision to GDP growth over the year to March 2023 and the year to March 2024 when the September quarter GDP figures are released next month. The updated projections presented in today’s MPS do not incorporate these revisions, and so are based on the data as last published with the release of the June 2024 quarter GDP figures back in September. These revisions are sufficiently historic that they don’t tell us much about the current degree of spare capacity in the economy, but they do show that New Zealand’s labour productivity in recent years hasn’t been quite as poor as was previously reported.
The net effect of the RBNZ’s revised GDP assumptions is that it now expects a substantially less negative output gap in the years ahead – i.e. less spare capacity in the economy, with the gap being closed sooner. This change is in turn reflected in the upward revision to the RBNZ’s forecasts of non-tradables inflation in the years ahead.
In a similar vein, the RBNZ has revised down its forecast of the peak unemployment rate for this cycle, from 5.4% to 5.2%. That partly reflects a lower-than-expected starting point, with the unemployment rate rising only to 4.8% in the September quarter, compared to the RBNZ’s forecast of 5.0%. The RBNZ is assuming that this shortfall will persist, with more people dropping out of the labour force altogether as hiring remains soft. We made a similar adjustment to our forecasts after the September quarter labour market surveys, though we still expect a higher peak next year of 5.4%.
The next RBNZ policy review will take place on 19 February 2025. Given the unusually long break until the next meeting, there will be a significant number of key domestic economic data releases ahead of that meeting. Indeed, the RBNZ will receive a new round of all of the top-tier quarterly indicators, and so there is plenty of scope for outcomes different to the 50bp rate cut signalled by the RBNZ. The most important releases are:
The Q3 GDP report (19 December): The outcome of this report will be compared to the RBNZ’s estimate, with any deviation having implications for the RBNZ’s estimate of the output gap and perhaps also its view on near-term growth momentum. As noted earlier, revisions to historical GDP data will also have a bearing on the RBNZ’s assessment.
The Q4 QSBO survey (14 January, TBC): The focus will be on indicators of spare capacity and cost/inflation pressures. It will also be interesting to see to what extent confidence, hiring and investment indicators are lifting from low levels as monetary conditions ease.
The Q4 CPI (22 January) and January Selected Price Indexes (14 February): With headline inflation now close to the RBNZ’s 2% target midpoint, the focus will be on whether the composition of the CPI – including key non-tradables prices – is evolving in a manner consistent with it staying there over the coming year.
Q4 labour market survey (5 February): Developments in both the unemployment rate and labour costs will be compared against the RBNZ’s updated estimates, while measures of labour input will provide some insight into how GDP might have fared during the quarter.
In addition to the above, key monthly activity indicators such as the BusinessNZ manufacturing and services indexes and the ANZ Business Outlook survey will also be of interest, as will developments in retail spending and housing indicators (albeit the latter tend to be difficult to read given that the housing market typically goes somewhat quiet over the holiday period). The Government’s Half-Year Economic and Fiscal Update and Budget Policy Statement (17 December) might also contain information bearing on expectations regarding the future stance of fiscal policy.
Aside from domestic indicators, the focus will be on any clarity that emerges regarding the implications of the Trump presidency for New Zealand’s export outlook and financial conditions (longer term interest rates and the exchange rate). The sustainability of this year’s rebound in dairy commodity prices will also move into focus as attention begins to turn to prospects for the 2025/26 season.
WELLINGTON (Nov 27): New Zealand's central bank cut rates for a third time in four months on Wednesday and flagged more substantial easing, including a likely half percentage point reduction in February, as inflation moderated to around the bank's target.
The Reserve Bank of New Zealand (RBNZ) lowered the cash rate by half a percentage point to 4.25%, as expected by most economists in a Reuters poll.
RBNZ governor Adrian Orr said there had been little discussion on cutting by anything other than 50 basis points (bps), a reality check for some in the market who had expected more, but signalled the likelihood of further loosening next year.
"Even with 50 basis points, we remain somewhat restrictive. There's significant output gap, significant spare capacity, so 50 (bps) felt right," he said at a news conference.
He added that the bank's forward projection for the February meeting was consistent with a further 50 bps cut.
The New Zealand dollar and short-end interest rates initially rose after the decision, which hit some in the market that had expected a larger 75-bps cut.
However, those gains partly disappeared, as investor focus shifted back to the governor's dovish comments.
Analysts broadly expect the central bank to cut by at least 25bps in February, but note there is a lot to happen before the next meeting.
"The RBNZ has left the doors wide open for its future moves, with no attempts to temper market expectations for the pace of future cuts," ASB chief economist Nick Tuffley said.
"It is also now a three-month gap until the RBNZ next meets, with a full cycle of quarterly domestic data and President (Donald) Trump’s inauguration in between," he said.
Orr said they expect to reach a neutral rate by the end of 2025, which he put at around 2.5% to 3.5%. The neutral rate is considered neither accommodative, nor restrictive for the economy.
Most of the major retail banks in New Zealand cut their interest rates, following the announcement.
Kiwibank chief economist Jarrod Kerr said while they expect the central bank to cut by just 25 bps in February, they saw scope for more easing later on.
"We believe rates need to be cut lower than the RBNZ's 2025 forecast track, to stimulate an economy struggling to get out of recession," he said.
The central bank noted that economic growth is expected to recover during 2025, as lower interest rates encourage investment and other spending. Employment growth is expected to remain weak until mid-2025, and for some, financial stress will take time to ease.
New Zealand is one of several central banks around the globe that have started cutting rates, as inflation has moved lower. Neighbouring Australia, however, is an outlier to the broad easing trend, with cuts not expected until the first half of next year.
The GBP/USD pair trades on a stronger note near 1.2570 on Wednesday during the early European session. The Pound Sterling (GBP) consolidates despite US President-elect Donald Trump announcing more tariff measures. Traders brace for the release of US October Core Personal Consumption Expenditures (Core PCE) - Price Index for fresh impetus.
Early Tuesday, Donald Trump pledged to impose tariffs on all products coming into the US from Canada, Mexico and China, which lifted the Greenback against the GBP in the previous session. The USD rally stalls on Wednesday as traders await the US Core PCE inflation data for more cues about the interest rate outlook.
Meanwhile, the US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, currently trades near the lower end of its weekly range of around 106.85. However, the potential downside for the Greenback seems limited amid the less dovish remarks from Federal Reserve (Fed) officials. The minutes from the November FOMC meeting released Tuesday showed that Fed officials expressed confidence that inflation is easing and the labor market remains strong, allowing for further interest rate cuts albeit at a gradual pace. Fed policymakers emphasized that further rate cuts likely will happen, though they did not specify the timing and pace of reductions.
Most Bank of England (BoE) policymakers support a gradual policy-easing approach. The BoE Deputy Governor Clare Lombardelli said on Tuesday that she needs to see more evidence of cooling price pressures before she backs another interest rate cut. The lower bets that the UK central bank will cut interest rates next month provide some support to the GBP for the time being.
What is the Pound Sterling?
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
How do the decisions of the Bank of England impact on the Pound Sterling?
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
How does economic data influence the value of the Pound?
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
How does the Trade Balance impact the Pound?
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
At 2.1%YoY, the October headline inflation rate was a little lower than had been expected and remained unchanged for a second month. This is well within the Reserve Bank of Australia's (RBA) inflation target (2-3%) though markets are not getting very excited, and there was little response from the AUD or bond yields to the figures.
The main problem is that these inflation figures are heavily distorted by government policy measures, and so the underlying rate of inflation is probably higher than this, and is likely to creep up in the coming months.
There are two important elements to this:
Firstly: cost of living electricity subsidies continue to have a large impact on the headline inflation rate. Since these began to bite, they have contributed a negative 1.3pp to headline inflation, which would otherwise be running at about 3.4% YoY. However, we feel that the maximum impact of these subsidies is now being felt, and over the coming months, their influence should drift back towards about zero or even turn positive, working against any underlying tendency for inflation to decline - which is in any case, not that evident.
Secondly: There is also likely to have been some drag on inflation from the rental component of housing, via the Covid-era Commonwealth Rental Assistance policy. The CPI measure of rents shows a slight decrease in the annual inflation rate and has not risen on a monthly basis by much recently, though the inflation rate is still running in the high 6% YoY range. The marginal impact on inflation now is probably only quite limited. It will be interesting to see which way this turns over the next few months.
Thirdly: After falling sharply for the last three months, the motor fuel component of transport also flattened out in October, and over the coming months, we would expect this to be less of a drag on headline inflation too - depending on some hard-to-predict geopolitical influences.
All of these factors are evident when you look at the trimmed mean inflation rate for October. Here, instead of declining, the inflation rate ticked up from 3.2% to 3.5%. And it is this core measure that the RBA is probably focussing on more than headline rates.
Looking at the other components of inflation, many remain well above levels that will be consistent with the RBA's inflation target, though furnishings, clothing, and communications are looking more respectable. This is also an improvement compared with a year ago when there were almost no components falling into the RBA's target range.
The upshot of all of this is that there is simply no rush for the RBA to do anything with rates anytime soon. Our 1Q25 rate cut forecast remains an "at the earliest" view, and there is certainly scope for this to be pushed back, whereas the scope for a near-term cut seems vanishingly small.
WTI Crude Oil price failed to extend gains above $71.50 and $71.65. It started a fresh decline and traded below the key support at $70.50.
Looking at the 4-hour chart of XTI/USD, the price traded below the 50% Fib retracement level of the upward move from the $66.71 swing low to the $71.65 high. The price even settled below the 100 simple moving average (red, 4-hour) and the 200 simple moving average (green, 4-hour).
On the downside, the first major support sits near the $68.60 zone. It is close to the 61.8% Fib retracement level of the upward move from the $66.71 swing low to the $71.65 high.
A daily close below $68.60 could open the doors for a larger decline. The next major support is $66.50. Any more losses might send oil prices toward $62.00 in the coming days.
On the upside, it faces resistance near the $70.00 level. The next major resistance is near the $70.80 zone. There is also a connecting bearish trend line forming with resistance at $70.90 on the same chart. The main hurdle is still near the $71.50 zone, above which the price may perhaps accelerate higher.
In the stated case, it could even visit the $72.80 resistance. Any more gains might call for a test of the $75.00 resistance zone in the near term.
Looking at Bitcoin, the bulls struggle to push the price toward the $100,000 level and the price started a downside correction below $95,000.
US Initial Jobless Claims – Forecast 217K, versus 213K previous.
US Durable Goods Orders for Oct 2024 – Forecast +0.5% versus -0.7% previous.
US Gross Domestic Product for Q3 2024 (Preliminary) – Forecast 2.8% versus previous 2.8%.
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