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The Reserve Bank of New Zealand cut interest rates by 25bp to 7.75 percent. Since January, the New Zealand dollar has plunged 13 percent, reflecting slower growth and the market’s expectations for further rate cuts. The market is looking for another 100bp of easing by the RBNZ over the next 12 months and for that reason, we still expect the NZD/USD to break 65 cents. The terms of trade in New Zealand was better than expected, but a persistent drought has caused exports to suffer while high interest rates and a weak housing market has pushed New Zealand into its first recession in 10 years. According to RBNZ Governor Bollard, there could be more rate cuts. Although that would depend on inflation and the price action of the New Zealand dollar, he expects monetary policy to be less restrictive going forward and for the economy to contract in the third quarter.
Dark Australian economy
Even though the Australian dollar ended the US session positive against the greenback, it is well off its highs. Like New Zealand, the outlook for the Australian economy is gloomy. Despite an improvement in business confidence, consumer confidence has deteriorated. The combination of weaker economic data and lower gold prices drove the Australian dollar below 80 cents.
Employment numbers are due for release this evening. The improvements in the employment component of service. Manufacturing and construction sector PMI all point to a stronger release. The Canadian dollar on the other hand held its own against the greenback despite weaker labor productivity in the third quarter and lower oil prices. The international trade balance is due for release on Thursday and we believe that the data should be negative for the Canadian dollar given the drop in the IVEY PMI index.
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