08.05.201916:08 Forex Analysis & Reviews: The reaction of the New Zealander to the decision of the RBNZ: a good mine in a bad game

The Reserve Bank of New Zealand has realized its intentions and reduced the interest rate by 25 basis points. Although at the April meeting, the regulator actually warned about such a step, the market reaction was quite violent. TheNZDUSD pair collapsed to the area of seven-month lows, that is, to the base of the 65th figure. During the European session, the price won back some of the lost positions, but the mood still remains subdued. After all, judging by the rhetoric of RBNZ members, the regulator is ready to soften the parameters of monetary policy again, if the measures taken do not bring the expected effect. Such prospects will put background pressure on the kiwi, while the prospects for the Northern trend depend entirely on the prospects for US-China trade relations.

It should be noted that just a day before the May meeting of the RBNZ, the Reserve Bank of Australia announced its decision. Contrary to the expectations of many experts, the Australian regulator maintained a wait-and-see position and even voiced optimistic notes on the prospects for the recovery of the national economy. Perhaps for this reason, NZD/USD traders reacted so emotionally to the generally expected decision of the New Zealand Central Bank. The stock market of the island state also played a role. The yield on 10-year government bonds fell to a minimum of one and a half months, thus putting additional pressure on the New Zealand dollar.

Arguing his decision, the Central Bank of New Zealand pointed to several factors, the dynamics of which will determine the fate of interest rates. First of all, it is the country's GDP growth. According to the latest data, this figure came out at 2.3%, showing a significant slowdown for the second quarter in a row. For comparison: in 2016, this indicator fluctuated around 3.9%-4.1%, in 2017 – in the range of 3%-3.4%, and at the end of last year, it fell to a multi-year minimum of 2.3%. As the head of the RBNZ noted, the risk of further decline remains high, against the backdrop of a slowdown in both global growth and economic growth in China and Australia, which are New Zealand's largest trading partners.

Another factor is the labor market. The situation here is not entirely straightforward. On the one hand, the unemployment rate in the first quarter of this year fell to 4.2%. But on the other hand, this dynamics is not due to the creation of new jobs, and the decline in the share of the economically active population. Thus, the share of the labor force of the total population in the last quarter decreased from 70.9% to 70.4%. Other key components of the New Zealand labor market were also disappointing.

For example, for the first time since the third quarter of 2015, the indicator of employment growth in quarterly terms decreased to a negative area (-0.2%). In annual terms, the indicator came out at 1.5% (the weakest growth rate since the beginning of 2016), thus continuing the downward trend (the indicator falls from the third quarter of last year). Moreover, according to the head of RBNZ Adrian Orr, the pressure on production capacity will weaken, which will affect the labor market accordingly. Orr also drew attention to the slowdown in the growth rate of wages. For three quarters, this figure came out at the level of 0.5%, but at the beginning of the current year, it unexpectedly decreased to 0.3%, contrary to optimistic forecasts of experts. The head of the RBNZ noted that this fact serves as another confirmation that the inflationary pressure this year will grow "very slowly".

By the way, weak inflation is another "headache" of the New Zealand regulator. The consumer price index in annual terms fell to 1.5% (from the previous level of 1.9%). In quarterly terms, the index remained at the level of the fourth quarter, that is, at 0.1%. Core inflation showed a negative trend, falling to one and a half percent – this is the weakest growth rate since last summer.

Thus, the Reserve Bank of New Zealand today had every reason to reduce the interest rate. The future trajectory of monetary policy will depend on the "three whales" of macroeconomic statistics: employment growth, inflation, and GDP. If the dynamics of these indicators will continue to be negative, the RBNZ may return to the issue of lowering the interest rate in the autumn.

Today's corrective pullback NZD/USD is a "good mine in a bad game", as there is no reason to restore the New Zealander at the moment. The correction is due to two reasons. First, the fact that the rate cut was partly taken into account in prices, so for the further development of the southern trend, an additional information drive was needed (which did not exist). Secondly, quite good statistical data from China was published today. So, during the first four months of this year, China's foreign trade turnover increased by 4.3% - to 9.51 trillion yuan (i.e. 1.41 trillion dollars). Exports grew by 6% (up to 5.06 trillion yuan), while imports - by 3% (to 4.45 trillion yuan). This result had a positive impact on the New Zealand dollar, as the economy of New Zealand is largely dependent on the economy of China.

But, in my opinion, this price rollback will be short-term. If the US does raise duties on imports from China, and the next round of US-China talks ends in vain, the NZD/USD pair will resume its downward movement to the annual minimum of 0.6522, followed by testing of the 64th figure.