By Stuart Talman, XE currency strategist
The market continues to hunt for a near-term catalyst as tariff related news flow has slowed and further progress awaited regarding peace talks for the Russia-Ukraine war. Whilst Trump did provide additional noise, threatening to impose 25% tariffs on cars, chips and drug imports, the market's reaction was muted given the perspective that these announcements are to be received as negotiating fodder.
The dollar is modestly firmer through Wednesday's sessions, the dollar index (DXY) ascending back through 107.00 as US treasury yields have firmed through the first half of the week following Friday's retail sales miss induced retreat. Whilst the DXY corrected over 3% from its 13 January swing high, north of 110.00, it would be shortsighted to proclaim the dollar's dominance has ended. The spectre of a trade war and US exceptionalism continues to underpin a strong dollar.
On the domestic front, the RBNZ has delivered a policy update devoid of any surprises, dispatching a widely expected third consecutive 50-bps cut. The key takeaways:
- RBNZ cuts the OCR by 0.50% to 3.75%
- OCR track - low point brought forward to early 2026
- Neutral rate estimated at 2.5% - 3.5%
Flagging moderating inflation and recent downward revisions to June and September quarter GDP growth, suggesting momentum in the economy was considerably weaker than previously measured, the RBNZ reasoned it was appropriate to once again opt for a double up. Having peaked at 5.5% in May 2023, Governor Orr and his board, commenced lowering the OCR in August and to date have unleashed 175-bps of easing. Via the opening paragraph of the statement:
"Annual consumer price inflation remains near the mid-point of the Monetary Policy Committee’s
1 to 3 percent target band……The economic outlook remains consistent with inflation remaining in the band over the medium term, giving the Committee confidence to continue lowering the OCR."
Given the nod to further cuts in addition to the RBNZ's estimate of the neutral rate being somewhere between 2.5-3.5%, the statement retained an easing bias whilst the revised OCR track confirmed the pace rate reductions would slow from here on. Notably, the new OCR track projects the same low point for this cycle, slightly above 3%, with the change being the revised timing. Previously, the easing cycle low was projected to be reached in late 2027…..now given the more aggressive cuts over the past three meetings and additional 25bps cuts over upcoming meetings, the terminal rate is projected for early 2026.
The New Zealand dollar immediately dropped from the low 0.57's through 0.5680, but within an hour-or-so had reversed its knee-jerk reaction. The rebound continued through the Asian afternoon and into the European morning, NZD/USD logging intraday highs a pip or through 0.5730. Awaiting the release of FOMC minutes later in the session, the Kiwi has handed back gains through the first half of US trade, dipping back below 57 US cents.
Risk sentiment appears to be deteriorating following the narrative of eurozone alienation following the apparent shut-out of Ukrainian president Zelensky from the first round of Russia-US peace talks. European equity markets logged sharp losses through Wednesday whilst the euro is softer for a third consecutive day.
In other news, annualised headline CPI for the UK has accelerated faster than expected, climbing from 2.5% to 3.0% (versus 2.8%, expected) whilst core inflation jumped from 3.2% to 3.7%. Most of the upside surprise can be attributed to a significant increase in food and energy prices. On a more positive note, services inflation, which is the Bank of England's biggest concern came in lower than expected…and when stripping out volatile items, inflation is moderating.
From a policy perspective, the BoE, unlike the RBNZ, must take a more measured approach to lowering its policy rate having implemented 3 x 25-bps cuts this cycle. The BoE faces a dilemma: inflation remains uncomfortably high whilst the outlook for growth continues to deteriorate. Market pricing calls for the next full cut to be delivered by June with more then 50-bps of easing projected by year-end.
Falling through 0.4500 following the RBZNZ decision, NZD/GDP reversed course heading into the London morning, ascending back through 0.4540. Choppy, convergent price action remains the state of play as the pair continues to trade with a mild downside bias.
To the day ahead, FOMC minutes are released an hour-or-so following the release of this morning's update. Attention will be given to the committee members perspectives regarding the need to cut rates in 2025. Aussie jobs numbers are the headline release, the unemployment rate expected to tick up from 4.0% to 4.1% with 20K new jobs created.
More of the same expected over the next 24 hours, the New Zealand dollar to range between the high 0.56's and low 0.57's.
Stuart Talman is Director of Sales at XE. You can contact him here.
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