NZDCAD RANGED BETWEEN 0.8602 AND 0.8386

NZDCAD

The NZD/USD is in a freefall. The catalysts behind the selling pressure are falling dairy prices, expectations of a rate cut by the Reserve Bank of New Zealand, and the possibility of a rate hike by the U.S. Federal Reserve.

The 40 percent decline in dairy prices since the start of March has traders wondering how much impact this would have on the country’s GDP as well as on the income of farmers. It has also has investors thinking about the strong possibility the RBNZ will decrease rates later this week.

Last week, Fed Chair Janet Yellen signaled before members of Congress that the U.S. Federal Reserve is on course for a possible rate hike in September. She cited improving labor conditions as one reason for the move. She also added that the crisis in Greece and the turmoil in China should not affect the central bank’s decision.

With the RBNZ considering a possible rate cut and the Fed a rate hike, the interest rate differential favors the Fed, making the U.S. Dollar a more favorable investment. The downtrend is likely to continue this week, but investors may use Wednesday’s RBNZ Rate Statement as an off.

Because of the sell-off, the RBNZ statement may actually turn into a sell the rumor, buy the fact situation.

BOC Cut Overnight Rate to 0.5%, Downgraded Growth Forecast "Significantly"

The Bank of Canada reduced the overnight rate by -25 bps to 0.5%, the lowest level since June 2010. It noted that headline inflation remained weak and was mainly pressured by low energy prices. On economic developments, the central bank acknowledged that the slowdown in growth in 1Q15 was driven by a scaling back in energy investment and weaker than expected non-energy investment. Yet, it expected growth would remain weak in the second quarter. As such, the BOC revised "significantly downgraded" its GDP growth forecasts. We expect the rate cut would provide only limited addition stimulus to the economy.

BOC noted that weakness in global economic developments since the last meeting has negatively affected Canada's economy. Policymakers lowered the GDP growth forecast for 2015, to +1.1% from +1.9% estimated earlier in the year, based on three reasons:

First, Canadian oil producers have lowered their long-term outlook for global oil prices, and have cut their plans for investment spending significantly more than previously announced.

Second, China's economy is undergoing a structural transition to slower, domestic-driven growth, which is reducing Canadian exports of a range of other commodities

Third, Canada's non-resource exports have also faltered in recent months. While this is partly due to the first-quarter setback in the U.S. economy, it's still a puzzle that merits further study.

On inflation, the BOC indicated that the softness of headline inflation, which had been hovering around the lower bound of the +1% to +3% target over the past several months, was largely due to low energy prices. Core inflation, which had moved slightly above +2% "because a decline in the dollar is raising the prices of imports", would drop to +1.5% to +1.7% of those factors were eliminated. The central bank stressed that all these measures of inflation would "converge on the underlying trend", should the "temporary effects dissipate".

In the BOC Business Outlook Survey released earlier this month, it pointed to "a diverging outlook across regions". The improvement in the economic developments was driven by "strengthening US demand". However, "weak oil prices" continued to "significantly dampen economic perspectives" in certain sectors and regions. On the job market, the survey suggested that "the balances of opinion on investment and hiring intentions are still weak, since firms tied to the energy sector plan to cut back on their investment and hiring". Yet, the labor gap, overall, was less extreme than it was a year ago, but the number of firms "still reporting labor shortages that are restricting their ability to meet demand remains low". Against the backdrop of strong full-time job growth and better outlook for future sales, this rate cut would provide very limited addition stimulus to the economy. We expect the BOC to keep its powder for the rest of the year. It would, however, maintained a rather dovish stance until mid-2016.