During the monetary policy normalization, there are always leaders and laggards. Among the first is the Reserve Bank of New Zealand, which raised rates in early October and intends to do so in November. How does this affect the NZDUSD, NZDJPY and EURNZD? Let us discuss the Forex outlook and make up a trading plan.
Monthly New Zealand dollar fundamental forecast
There are always heroes among central banks, as well as among people. While the majority are in the trenches, individuals rush into the attack. In Forex, such a fearless warrior is the Reserve Bank of New Zealand. In early October, it was the first among the G10 to raise the basic interest rate from 0.25% to 0.5%, allowing Kiwi to become the best performer of the month. At the same time, the targets for the NZDJPY longs and EURNZD shorts mentioned in the previous article were fulfilled, and a long NZDUSD trade was successfully opened.
According to Nomura research, due to COVID-19, the growth rate of the global economy in the next decade will slow down to 2.5%, compared to 2.8% before the financial crisis and 3.4% before 2008. Such global GDP dynamics make it possible to predict a lower cost of borrowing. In particular, the company expects the federal funds rate is unlikely to rise above the 2.5% recorded in 2018 and the 5.25% recorded in 2006. If the Fed does not act aggressively, why would other central banks do it?
Fortunately, many of them work according to the classical principle: the higher inflation climbs and the faster the labor market recovers, the more arguments in favor of tightening monetary policy. In this respect, RBNZ’s actions seem logical. In the second quarter, the unemployment rate in New Zealand fell from 4% to 3.4%, while Bloomberg experts forecast 3.9%. This is the lowest mark since 2007 and the lowest in the history of record-keeping. It looks like the outbreak of COVID-19 and the Oakland lockdown has had little impact on the workforce, which will strengthen the central bank’s desire to continue monetary restrictions.
Dynamics of unemployment and inflation in New Zealand
Moreover, the situation with consumer prices in New Zealand is also good. After accelerating to 4.9% in the third quarter, Bloomberg experts expect further acceleration to 6% in the coming months. RBNZ clearly does not intend to tolerate this. Interest rate swap markets are 100% confident that the cash rate will increase at the November 24 meeting and expect it to continue to rise in February. Moreover, in recent days, there have been rumors in Forex that Adrian Orr and his colleagues at the next RBNZ meeting will increase the key interest rate by 50 bps, not 25 bps! This circumstance contributes to the growth of the kiwi price against the major world currencies.
The NZDUSD bulls are supported by the Fed’s slowness and the growing global risk appetite, confirmed by a number of new S&P 500 highs. In my opinion, traders should focus on divergences in monetary policy and buy NZDJPY and/or sell EURNZD. In the first case, the correction of the yen creates a favorable opportunity for buying the pair in the direction of 84 and 86. The targets for short EURNZD trades are the levels of 1.6 and 1.585.
Price chart of NZDUSD in real time mode
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