New Zealand’s Central Bank talks down its dollar, ready to intervene
By Arnaud Masset
The Reserve Bank of New Zealand has signalled its readiness to intervene with what it sees as an overvalued NZ dollar. In a Monetary Policy Statement issued on 10 August, the Bank declined to change its cash-lending interest rate from 1.75%, but emphasised that the rate could fall if the Kiwi does not weaken. Shortly after RBNZ Assistant Governor John McDermott repeated the message in a media conference, the Kiwi tumbled 0.60% against the US greenback to 0.7267.
The Bank has been pushing down on the NZ dollar since late June, when the country’s Q2 inflation rate was reported as flat. McDermott yesterday characterised the bank’s pressure as a ‘nudge’ as opposed to a ‘slap in the face’, but the marching orders are nonetheless clear. We maintain our bearish view on the NZD, with 0.72 USD as the next short-term target.
Mexico: no rate reduction…….yet
By Yann Quelenn
We expect the Bank of Mexico not to change its overnight lending rate from 7% when it meets on 10 August, but a rate cut is likely to come by yearend. We are turning bearish on the MXN, because Banxico will dampen currency appreciation to keep it in line with the US dollar and economy.
This year Banxico has increased its overnight rate four times, sparking a runup of the peso from 22 to 17 per USD. Exports have also supported the MXN, driven particularly by strengthening oil prices. But now, further export gains are uncertain, and the US-Mexico free trade agreement is up for renegotiation with a Trump Administration that is diffident at best about expanding Mexican imports.
For now, we believe Banxico will try to maintain its rate differential to that of the US Federal Reserve, to avoid capital outflows. However, Mexico’s economic fundamentals are soft, and Banxico will be quick to cut rates if the Fed’s plan for ‘normalisation’ encounters difficulties or is delayed.