Tuesday, September 22, 2020

Will the RBNZ ease policy tomorrow? Or will it save its tools for its meeting later in November?

  • Dollar
  • NZD
  • Reserve Bank of New Zealand


Analysts’ Pick: Will the RBNZ ease policy tomorrow? Or will it save its tools for its meeting later in November?

  • Powell is likely to intensify his call for additional fiscal support from Congress at his testimony from Tuesday to Thursday this week
  • The absence of fiscal stimulus will probably dampen the outlook for the US’ economic recovery in Q4 and possibly in the longer-term as well
  • The greenback may show an initial downside skew on Powell’s speech but could potentially rebound thanks to increased risk aversion
  • RBNZ to ease policy further, but more likely to be in November’s meeting instead of tomorrow as the central bank has some leeway to delay stimulus until after the October general elections in New Zealand
  • The Kiwi looks set to drop as a result, continuing its downtrend to break the 50-day moving average

Fed Chair Jerome Powell will testify on the CARES Act before the House Financial Services Committee today, where he is expected to continue his calls for more fiscal stimulus from Congress. Powell has already alluded to this during his post-FOMC meeting speech earlier this month, and is likely to reiterate his view more strongly in front of Congress. Additional stimulus has already been delayed by much longer than market expectations, with initial sentiment for a stimulus bill to be passed earlier in August. But it now looks more likely that any stimulus proposal will only be able to be passed later this year after the November presidential elections as pre-election politics reduces the chances of either party compromising on their proposals.

The absence of additional support from the government is likely to put additional pressure on the US economy, potentially reducing the effectiveness of earlier fiscal and monetary policy earlier this year. With the expiry of enhanced unemployment benefits as part of the CARES Act, as well as the limited usefulness of US President Donald Trump's executive orders to partially extend them, the outlook for the fourth quarter of 2020 is likely to be worst off. Unemployment has shown signs of flattening, recovering from the earlier record highs but continues to hover at levels last seen during the Great Depression. Bloomberg estimates the hit to GDP growth in the fourth quarter to be at around 5 percentage points due to the lapse in fiscal policy. This stems from the potential drop in personal income that has remained relatively resilient despite the record high levels of layoffs that we saw during April.

Fiscal stimulus pay outs supported personal income from Q2 to early Q3 despite the spike in unemployment


In addition, the impact from weaker consumption is likely to be long-lasting and not only a short-term effect on the economy. As unemployment continues to run at high levels for longer, employability starts to weaken as well, which is likely to result in higher unemployment levels for longer. This is not limited to consumption as well, since the US is reliant on domestic consumption, smaller businesses can be another potential weak point in the US economy as bankruptcies continue to spike due to weak aggregate demand. Powell's speech may very well highlight these issues, which is likely to put an initial spike of downward pressure on the dollar before rebounding as increased risk aversion takes precedence.

It's only a matter of time before the Reserve Bank of New Zealand (RBNZ) eases monetary policy further, but it looks more likely that we will see additional stimulus policies at the central bank's meeting later in November's meeting instead of tomorrow. The RBNZ expanded its Large Scale Asset Purchase (LSAP) program to NZ$100 billion at its August meeting, just ahead of the reintroduction of lockdown restrictions in Auckland due to the spike in Covid-19 cases in the area. Other major moves from the central bank include:

  • Keeping its Official Cash Rate (OCR) on hold at 0.25%
  • Tasking central bank staff to prepare package of instruments for additional easing
  • Package of instruments under consideration include negative or reduced OCR, Funding for Lending programme and foreign asset purchases, with negative or reduced OCR and Funding for Lending programme being preferred by policy makers
  • Policymakers noted that the economic recovery in the country was better than it anticipated during its May meeting

While the central bank has an easing bias, the RBNZ will most likely wait up until the next meeting in November for a better overview of the economy to decide on whether additional stimulus is needed. This is boils down to a couple of factors. The first of which is the upcoming general elections in New Zealand that is set for October 17th. With elections close by, the central bank is more likely to adopt a wait-and-see approach to better factor in future fiscal policy changes before deciding on easing monetary policy further. The other factor is that while Auckland's lockdown has put downward pressure on New Zealand's economic recovery, it's impact likely wasn't large enough to push policymakers to be lean strongly towards additional easing as of yet. Furthermore, New Zealand has since announced the easing of lockdown restrictions across the country to lower levels since August (The New Zealand government announced that it would start to ease restrictions on Sunday, with Auckland shifting into a level 2 alert, while the rest of the country will move into level 1 from September 24th).

The dent in the economy due to Auckland’s renewed lockdown restrictions doesn’t warrant any strong bias for easing from the RBNZ


Both factors when coupled together will likely give the central bank some room to delay easing to later in November. However, the central bank will probably reinforce its willingness to do more, i.e. sending stronger signals that it is planning for additional stimulus later this year. This will likely put downward pressure on the New Zealand dollar on the announcement from the RBNZ tomorrow at 10am (GMT +8). As a result, NZD/USD may continue to dip today and tomorrow due to a stronger dollar and weaker kiwi. On Powell's speech, we may see an initial bounce back in NZD/USD towards the resistance at 0.6670 before continuing to drop back down closer towards 0.6623's level. On the RBNZ's monetary policy announcement, there is likely to be increased volatility which may result in a drop closer towards 0.6584's level, which would be a maximum downside potential of about 0.94% from the time of writing.

Technical Analysis:


The Kiwi has slide back into a downtrend bias, with the currency pair retesting its 50-day moving average as the dollar continues to show strength over the past two days. MACD shifting into a downtrend suggests that NZD/USD may be able to break the key level and progress downwards into a deeper downtrend in the short-term. We should be able to see a short rebound towards the resistance at 0.6670 as some traders buy-the-dip at the 50-day moving average. However, we view this to be momentary as a result of short-term fundamentals tilting the outlook for the currency pair towards the downside. We may be able to see a retest of the 0.6584 support level at tomorrow’s RBNZ monetary policy meeting due to increased volatility.

Support: 0.6623 / 0.6584 / 0.6550

Resistance: 0.6670 / 0.6708 / 0. 6773

NZD/USD Chart (H4)