Strategist and Models & Technicals

Strategist and Models & Technicals

Economic Outlook
Today's National Bank survey confirmed the parlous state of the New Zealand economy. But, in doing so, it suggested that the local economy would fare no worse than we already anticipate in our forecasts. There's still some life in the corporate sector yet, and where there's life, there's hope. Even so, business profitability is clearly under immense pressure. In response, firms are slashing investment and looking to lower staff numbers. We stick to our view that the unemployment rate will head quickly to 7%, and that the risks to this view are skewed firmly to the upside. Of course, that poses a significant threat to household incomes and, potentially, retail spending, in turn. Either way, we suspect that household confidence, at the moment still showing signs of a fair degree of resilience, will wane as the impacts of a weaker employment market become all the more obvious.

Interest Rate Outlook and Strategy
After some to-ing and fro-ing in recent weeks, the market's moved into line with our view that the RBNZ will cut the OCR by a further 75bp on 12 March. If anything, the global environment, clearly a prime focus for the Reserve Bank (as noted by it in recent missives) has deteriorated still further since the previous meeting at the end of January. On its own, that’s enough to support the call for another aggressive cut, with the moribund state of the local economy only adding further weight to such a move. But while we don't think there's much to be gained by taking any sort of position into March's decision, there's still some potential for the eventual trough to push lower from the market's current expectation of 225%. We think 2.00% is more likely, and thus see some value in maintaining a long position in short rates. However, we also remain mindful of the risk that the thin trading of late poses.

Currency Outlook
Consolidation has been the tone of the past two weeks, with NZD/USD traversing a 0.5000-0.5200 range. And even though there's no shortage of economically important events on the calendar, we suspect that it will take some extra-ordinarily bad news, either here or abroad, to push the NZD/USD below the well-established support of 0.5000. NZD crosses are a slightly different story, with more potential for moves of note. NZD/EUR, in particular, has scope for a rebound, given its slide over the past few weeks and the reality that Europe’s economy is in far worse shape than that of New Zealand. We suspect EUR sentiment will take a battering in coming weeks, with consolidation within 0.4000-0.4200 likely near term.

Models and Technicals: Click Here

Strategist: Click Here

ENDS

© Scoop Media