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New Zealand’s Treasury department is scheduled to reveal its annual budget plans this week. Will they extend the Kiwi’s weakness from last week?

Annual budget event

On May 17 at 2:00 am GMT New Zealand’s Treasury department will print its annual budget release.

Recall that in last year’s budget event the office presented a positive outlook, expecting rising surpluses, average wages, and jobs created in the next three years. Fast forward to today and wage growth remains tepid and exporters are uncertain.

In addition, at least two ministers have shared plans to boost spending. Foreign Minister Winston Peters shared that New Zealand would send more aid in the South Pacific to protect the country’s interest. Meanwhile, Finance Minister Grant Robinson recently revealed a $42B infrastructure program over the next five years. Makes it just a bit harder to get that optimistic surplus, no?

Analysts are already low key expecting a not-so-rosy picture from the event this week, so upside surprises (or maybe the right amount of optimism) could help stem the Kiwi’s losses.

Take note that last year’s optimism was also widely expected, which resulted in a buy-the-rumor-sell-the-news situation after the event.

Overall risk sentiment

While the RBNZ’s surprising neutral stance played a big part in dragging the Kiwi, overall risk sentiment also enticed a few bears.

This week pay close attention to how the markets react to any developments regarding Iran’s nuclear deal as well as any (positive?) news about the upcoming meeting between Donald Trump and Kim Jong Un. Watch out for any headlines that could mean increased geopolitical conflicts!

Last Week’s Price Review

The Kiwi is currently the biggest loser of the week (as of 7:00 am GMT).

Overlay of NZD Pairs: 1-Hour Forex Chart
Overlay of NZD Pairs: 1-Hour Forex Chart

The Kiwi actually had a somewhat strong start, likely because of the risk-friendly vibes at the start of the week.

Sadly for Kiwi bulls, political troubles in Italy and Trump’s announcement that he was leaving the Iran Deal caused risk aversion to make a strong comeback on Tuesday, which pushed many NZD pairs below last week’s closing prices (dashed horizontal line).

However, the real reason for the Kiwi’s poor performance this week is the RBNZ monetary policy statement.

As for specifics, the RBNZ downgraded some of its growth forecasts for 2018 and 2019.

  • 2018 March – downgraded to 0.7% (0.8% previous)
  • 2018 June – 0.8% (unchanged)
  • 2018 September – 0.9%  (unchanged)
  • 2018 December – 0.8% (unchanged)
  • 2019 March – downgraded to 0.8% (1.0% previous)
  • 2019 June – downgraded to 0.8% (0.9% previous)
  • 2019 September – 0.8% (unchanged)
  • 2019 December – 0.8% (unchanged)
  • 2020 March – 0.8% (unchanged)
  • 2020 June – downgraded to 0.7% (0.8% previous)
  • 2020 September – upgraded to 0.8% (0.7% previous)
  • 2020 December – 0.7% (unchanged)
  • 2021 March – upgraded to 0.7% (0.6% previous)
  • 2021 June  – 0.5% (new)

The RBNZ also downgraded its CPI forecasts for 2018 and 2019.

  • 2018 June – downgraded to 1.5% (1.6% previous)
  • 2018 September – 1.6% (unchanged)
  • 2018 December – downgraded to 1.6% (1.8% previous)
  • 2019 March – downgraded to 1.6% (1.7% previous)
  • 2019 June – downgraded to 1.6% (1.8% previous)
  • 2019 September – downgraded to 1.6% (1.8% previous)
  • 2019 December – downgraded to 1.7% (1.8% previous)
  • 2020 March – 1.8% (unchanged)
  • 2020 June – 1.9% (unchanged)
  • 2020 September – 2.0% (unchanged)
  • 2020 December – 2.0% (unchanged)
  • 2021 March – 2.0% (unchanged)
  • 2021 June – 2.0% (new)

Moreover, the RBNZ pushed back its projections for the OCR to show a rate hike by the September 2019 quarter (Q3 2019), which is one quarter later compared to its forecasts from the February RBNZ Monetary Policy Statement.

Source: May RBNZ Monetary Policy Statement
Source: May RBNZ Monetary Policy Statement

However, what likely convinced traders to dump the Kiwi hard across the board was the shift in the RBNZ’s forward guidance.

If you can still remember, the RBNZ has always had a hiking bias. It just so happens that the RBNZ thinks that the timing is not right when it noted that:

“A premature tightening would risk undermining growth and employment, and could cause inflation to settle below the midpoint of the target range.”

In this week’s monetary policy statement, however, the RBNZ shifted to a more neutral stance when it flat out stated that:

“The direction of our next move is equally balanced, up or down. Only time and events will tell.”

The RBNZ did try to cushion its openness to a potential rate cut when it noted that rate cuts are not needed at the moment because:

“A further reduction in the OCR, to return inflation to the target mid-point more quickly, risks creating unnecessary volatility in output, employment, and interest rates.”

However, the fact remains that the RBNZ no longer has a hiking bias and is even open to the possibility of a rate cut. And that’s very likely why traders reacted strongly to the RBNZ statement.