The major event for the New Zealand dollar this week is the monetary policy meeting of the Reserve Bank of New Zealand. Unfortunately for the currency, the policy outlook is dovish.
The kiwi (as the New Zealand currency is nicknamed) has entered an uptrend last week with the help of positive economic data. GlobalDairyTrade reported that dairy prices increased after the losing streak that has lasted two auctions. The ANZ business confidence improved, reaching the highest level in six months. Yet all the positive signs may be unable to support the currency if the New Zealand central bank eases its policy at the Wednesday’s meeting.
The vast majority of analysts expect the RBNZ to cut its key interest rate from 2.75 percent to 2.5 percent. It is important to note that traders would watch not just the decision itself but also the accompanying statement. The interest rate cut may have a muted impact on the kiwi if the bank signals an end to the easing cycle.
Saying that, market analysts remain bearish on the currency in the longer term. The outlook for monetary tightening from the Federal Reserve weighs on all currencies (except the US dollar, of course), and the policy divergence between the RBNZ and the Fed makes the situation even worse for the New Zealand dollar. Forex Crunch said:
Monetary policy divergence looks clearer than ever, with an imminent cut in New Zealand and an imminent hike in the US. Despite some strength in the local economy, the RBNZ doesnât want a strong NZD and will make a clear case for that.
DailyFX echoed such sentiment, saying:
The long-term outlook for NZD/USD remains tilted to the downside amid the deviating paths for monetary policy, and more of the same from Governor Wheeler may drag on the exchange rate as the central bank keeps the door open to implement lower borrowing-costs.
Yet it also warned:
However, the kiwi-dollar stands at risk for a larger correction and may continue to recoup the losses from earlier this year should the RBNZ change its tune for future policy.
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