Top 5 Events: May RBNZ Meeting Preview & NZDUSD Price Forecast

05/08 WEDNESDAY | 02:00 GMT | NZD RESERVE BANK OF NEW ZEALAND RATE DECISION

The Reserve Bank of New Zealand’s overnight cash rate peaked at 3.50% in May 2015 and has been on a slow erosion over since; the most recent 25-bps rate cut was at the November 2016 meeting. Mounting concerns about a soft economy may have reached the tipping point in recent weeks, finally provoking the Reserve Bank of New Zealand into its first rate move in two and a half years.

The Q1’19 New Zealand GDP report showed that growth was weaker than anticipated, coming in at 2.3% annualized versus 2.5% expected, from 2.6% in Q4’18. Meanwhile, the Q1’19 New Zealand inflation report produced a similar disappointment, registering 1.5% versus 1.7% expected, from 1.9% (y/y). Overall, the Citi Economic Surprise Index for New Zealand, a gauge of economic data momentum, has fallen from -1.8 to -11.2 since the March RBNZ meeting.

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Since the last RBNZ meeting in March, traders had steadily pulled forward expectations of a 25-bps rate cut into the first half of 2019. Prior to the last RBNZ meeting there was a 7% chance of a cut at the May meeting; coming into this week, there was a 51% chance of a 25-bps cut on Wednesday.

But after the Reserve Bank of Australia opted to keep rates on hold rather than go the cut route, traders have taken a different perspective on the RBNZ. In the wake of the RBA's decision to punt its rate decision until June, traders are leaning into the same fate for the RBNZ: overnight index swaps now foresee a 36% chance of a rate cut at the May RBNZ meeting.

Pairs to Watch: AUDNZD, NZDJPY, NZDUSD

NZDUSD TECHNICAL ANALYSIS: DAILY TIMEFRAME (APRIL 2018 TO MAY 2019) (CHART 1)

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The near-term price forecast for NZDUSD remains bearish as technical studies point to a weak momentum environment. Price remains below its daily 8-, 13-, and 21-EMA envelope, while both daily MACD and Slow Stochastics point lower in bearish territory.

After breaking the early-2019 flash crash low set on January 3 at 0.6587, NZDUSD prices established a fresh 2019 low at 0.6580 in the final week of trading in April. As such, a move below the April low of 0.6580 would likely trigger an effort to return back to the November 1, 2018 low at 0.6514. The near-term bearish price forecast for NZDUSD would be negated were price to return above the April 30 high at 0.6685.

IG CLIENT SENTIMENT INDEX: NZDUSD PRICE FORECAST (MAY 7, 2019) (CHART 2)

NZDUSD: Retail trader data shows 71.9% of traders are net-long with the ratio of traders long to short at 2.56 to 1. In fact, traders have remained net-long since April 2 when NZDUSD traded near 0.68032; price has moved 3.0% lower since then. The number of traders net-long is 8.0% higher than yesterday and 22.4% higher from last week, while the number of traders net-short is 8.4% lower than yesterday and 23.9% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests NZDUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bearish contrarian trading bias.