RBNZ surprised markets at its June policy meet with a rate cut which further reinforced NZD weakness. Monetary Policy Statement that followed was particularly dovish, it included an explicit easing bias, supported by incorporating a further 25bp easing in its interest rate forecast profile, and used strong language on the NZD.Further easing is in the pipeline with RBNZ likely to cut its OCR by 25bp at each of the July, September and October meetings. Persistently low inflation remains the primary concern for the bank. RBNZ forecast headline inflation to accelerate only slowly over its forecast horizon, not reaching the mid-point of its 1-3% target band until the end of next year.“The recent rate cut was expected and we forecast another 25bp easing to 3.00% in July in response to extremely low inflation, low commodity prices and an expensive currency (markets currently price a 75% chance of 25bp cut in July and about 50bp of easing over the next 12 months)”, says Barclays in a note to its clients. NZ business confidence fell sharply to 3yr low in Q2-survey. Data kept the kiwi on the defensive as it added to evidence that slowing economic growth will likely require more interest rate cuts in the coming months.Dairy prices have declined sharply in recent months (down over 35% since early March) in response to moderating Chinese demand and growth in global supply. This along with rising oil prices have further weighed on NZ’s terms of trade. Looking ahead, the RBNZ expects this trend to continue, which should result in further NZD depreciation.NZD/USD trades at 0.6630 = fresh 5yr low, it has tumbled 14 percent on the greenback in the past two months, and we believe its losses will continue to mount given that market uncertainty will likely keep investors risk averse. We forecast NZD at 0.6400 by the year-end.
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