Afternoon analysis 10.08.2016

High probability of an interest rate cut in New Zealand, but will it be enough to significantly lower the NZD? No significant changes on the PLN. Only the dollar is softer to the PLN.

At 23.00 CET, the Reserve Bank of New Zealand is scheduled to make a decision regarding interest rates. All economists surveyed by Bloomberg expected that the RBNZ cuts its benchmark by 25 bps, to 2.00%.

Additionally, if we look at market instruments measuring the future rate, it is clear that beside of the decision today, investors should expect two more cuts by mid-2017. There is, however, a question of whether it will be a strong enough impulse to decrease the inflow of portfolio investments and lower the local currency?

In looking at the CFTC data, we can seen the speculators’ position toward further NZD/USD gains. At the beginning of August, the amount of bullish positions (on NZD gains) was very close to the highest levels in at least a decade. Theoretically, most market participants don’t believe that the RBNZ may be dovish enough to push interest rates significantly lower.

Taking into account lower inflation and an elevated currency rate, the central bank could cut rates faster, according to the RBNZ. However, it must balance its move with a still strong real estate market. According to REINZ (Real Estate Institute of New Zealand), the median home price exceeded 500k NZD and rose at 8.6% y/y.

Overall, the RBNZ would probably like to lower the value of the NZD, reduce the current account deficit and discourage some foreign capital. It would like to combine all of these moves without fueling more of a real estate boom. As a result, the central bank will probably remain reluctant to suggest significant monetary easing to deal with all issues. Finally, even if there is a rate cut, the NZD/USD slide may be limited, especially taking into the account the most recent weakness of the US dollar.

Lower dollar

The zloty remains fairly stable to both the euro and the franc. Due to further pressure on the pound, the GBP/PLN is close to its lowest levels, at 4.97, since January of 2014. In recent days, the US currency is also under pressure and it is getting closer to the 3.80 mark. It is also worth noting that it is a result of a consequence of global moves rather than impulses generated from Poland.

The Polish GDP reading for Q2 is scheduled on Friday. The economists’ consensus assumes a growth around 3.3% y/y. Taking into the account a negative surprise from the previous quarter, if the investment component also remains weak in the QE the final data, it could create some level of nervousness on the market.