Overview and expectations for September 27, 2018

Overview and expectations for September 27, 2018, including RBNZ OCR

This overview highlights the most significant economic events taking place today: New Zealand’s Official Cash Rate (OCR), Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement, RBNZ Rate Statement, RBNZ Press Conference and US Core Durable Goods orders MoM and Final GDP QoQ. Traders can benefit from anticipating and understanding how these data releases can affect the markets.

Today’s overview focuses on the interest rate policy statement of New Zealand’s Official Cash Rate (OCR), Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement, RBNZ Rate Statement, RBNZ Press Conference and US Core Durable Goods orders MoM and Final GDP QoQ. This data can affect the markets and the currency of the respective country. Traders can benefit by anticipating those effects and trading accordingly.

NEW ZEALAND’S OCR

The governor of the New Zealand’s Reserve Bank (RBNZ) makes the country’s interest rate decisions. Before decision-making takes place, the governor seeks advice from senior bank staff and external advisers. Traders observe interest rate changes as short-term interest rates are the key trading signals which indicate changes in a currency’s valuation. If the reading exceeds expectations this can be bullish for NZD, while a lower than expectations value can be bearish.

August’s actual OCR readings were as expected, remaining unchanged at 1.75% since November 2016 when RBNZ decided to reduce it from 2%. Current expectations indicate no change in the rate. This is likely to be a bearish indicator for the NZD.

RBNZ MONETARY POLICY STATEMENT

Monetary Policy Statements outline a Central Bank’s economic assessment based on current economic conditions, both foreign and domestic. During August, RBNZ stated that although GDP development has slowed in the past years, higher exports are expected to increase growth between 2018 and 2020. Currently, risks for economic development are minimal. Employment levels are currently at the maximum maintainable volume. Inflation is still below the 2% mark mid-point, but there are indications of a possible rise. RBNZ will continue to support employment and bring inflation to the desired 2% target.

According to RBNZ’s Policy Statement, the rate will likely remain the same throughout 2019 and into 2020. The low interest rates are expected to support the economy as employment remains healthy. Therefore, salaries will likely rise. While uncertainty remains, the RBNZ will continue to monitor any risks involving business confidence, investment decisions, inflation rise and slow Gross Domestic Product (GDP) growth.

According to the RBNZ governor Adrian Orr, if any issues materialise, then the rates will be adjusted accordingly to ensure inflation hits the target while contributions to sustainable employment continue at a maximum.

During the last quarter, the economy expanded 1% faster than in the past 2 years which was behind the decision to leave interest rates the same. Paul Dales, chief Australia and New Zealand economist at Capital Economics has an alternative outlook: “We still believe that the combination of low confidence, a subdued housing market and easing net migration will result in growth slowing further next year rather than accelerating as the RBNZ hopes.”

If actual readings fall below expectations. this will most likely indicate negative or no change for the currency. However, if actual values are positive, this will mean a bullish change for the NZD.

RBNZ RATE STATEMENT

The rate statement is used as a means of communication between RBNZ and its investors regarding its monetary policy. Rate statements usually provide the result of the interest rate vote and a brief discussion of the economic forecast offering indicators for future vote outcomes. The cash rate remains at 1.75%. RBNZ expects to keep the OCR level until 2020. According to the statement global growth in association with lower NZD exchange supports export earnings. Government spending should also increase. Consumer consumption remains strong. Current economic indicators show a welcome rise in inflation; however, inflation may rise faster than expected. If inflation does reach its target earlier, RBNZ will adjust the ORC to maintain desirable levels. Rise in OCR will most likely mean a bullish change for the NZD.

RBNZ PRESS CONFERENCE

Press conferences are meetings held for the official distribution of information, usually to the media. After the distribution of information, conference board members receive questions from reporters regarding their decision-making, requesting clarifications for certain positions and actions. During August’s RBNZ press conference, Adrian Orr reinforced the Bank’s policy statement applying a dovish approach towards trade exports and expects growth to pick up without any OCR altering. Despite high confidence in the economy, RBNZ remains vigilant monitoring risks that could arise such as investment decisions, business confidence, inflation rise and slow GDP growth.

US CORE DURABLE GOODS ORDERS MOM

Core durable goods orders data is collated and analysed by the United States Census Bureau. It calculates the change in the total cost of new orders for hard-wearing manufactured products, excluding transportation items. Traders can use this economic indicator to identify changes in manufacturing activity. Higher than expected readings usually indicate a bullish change for USD, while a lower than expected value can be bearish.

Actual readings for August were less than the expected 0.5%, dropping to 0.2%, lower than July’s 0.4% reading. According to analysts, the drop was due to an overall decrease in civilian transportation equipment demand. August’s data shows that consumer consumption remains strong for the third quarter. However, there are indications of slowing down due to the increased tension between the US and China. The US Census Bureau expects a 0.5% increase for September, but other analysts suggest only a 0.1% increase in new orders. Divided opinions are a source of volatility and traders should see this as a major opportunity to invest. A value that is lower than expectations can be bearish for USD while higher than expectations value signals bullish change.

US FINAL GDP QOQ

Gross Domestic Product (GDP) is the market value of all finished goods and services produced within a country’s borders in a specific time period. Analysts usually calculate GDP on a yearly basis, but some counties also give quarterly releases.

A higher than expected reading is generally bullish for the USD, while a weaker than expected reading is bearish.

Last quarter’s actual GDP reading was 0.2% lower than the expected 2.2% indicating a weakening of the USD. In July, preliminary GDP reading indicated 4.1% growth as expected by analysts. Expectations for the secondary – August’s expectations were lower than the actual 4.2% at 4.0%, indicating a bullish move for the USD. According to the US Bureau of Economic Analysis: “The upward revision to the second estimate of GDP growth mainly reflected upward revisions to business investment in intellectual property products and  downward revisions to imports.”

Analysts expect September’s final GDP reading to be higher as analysed data from the Commerce Department shows higher consumer spending than originally estimated. Despite the ongoing friction between American and Chinese economies, analysts forecast growth for the US economy. Consequently, analysts suggest that the fiscal economic stimulation will bring the unemployment rate to new lows, while interest rates may be pushed higher by the Federal Reserve.

The US Bureau of Economic Analysis expects a steady Final GDP reading for September, maintaining its current value of 4.2.%. If the actual reading is lower than expected this will most likely indicate a weaker USD. However, if the final GDP value is higher than the projections, this could mean a bullish change for the currency.

For more information about how to use economic indicators like GDP to make the most out of your trades, contact FXB today.

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