Summary:

• NZ dollar continues sliding following the RBNZ meeting, in line with our expectations
• China reports a tremendous miss in the trade data for January as the Lunar New Year weighed on
• US Senate reaches a long-awaited bilateral agreement providing funding over the next two years

The RBNZ meeting was by far the most important and the most awaited event during the past Asian session. Even as the Bank left rates unchanged as broadly expected, the NZ currency lost ground in the aftermath, which was in line with our forecasts provided yesterday. The statement was more or less in line with that presented in November last year, albeit there were a bit more dovish remarks on the exchange rate but they should not be surprising given a more than 2% increase of the NZD TWI. The call as for the first hike in the second quarter of 2019 was maintained. On top of that, the communique underlined policy will remain accommodative for the considerable period of time and acknowledged the labour market conditions continue to tighten. One of the most dovish point concerned updated inflation forecasts as the RBNZ slashed its predictions, as a result, this year CPI is seen at 1.1% (down from 1.5%) while 2019 CPI is forecast to be at 1.7% (down from 2%) and 2020 CPI should be at 1.8% (revised down from 2%).

RBNZ revised down its inflation forecasts, the output gap 2019 projection was cut as well. Source: RBNZ

Furthermore, one needs to mention the updated output gap forecast for the next year which was cut from 1% to 0.5% reflected by lower GDP growth and higher potential output. This could be viewed as another more dovish signal undercutting the overall inflationary backdrop. During the press conference acting governor Spencer said he is not concerned about the NZ dollar expecting it to drive lower in the nearest future but not so much. He also added that there is no reason to change OCR forecasts solely due to equity volatility, what’s more if increased volatility translates into interest rate markets it would be an upside risk on the Bank’s interest rate track. These comments accord with ours that the latest spike in realized and implied volatility did not spread over other markets being not so much disruptive. Spencer concluded his speech suggesting that the next move could be up or down depending on the inflowing data. Apart from him, McDermott weighed in on the exchange rate thread as well saying that if the NZD TWI moves up, a change in language should be expected. Chief RBNZ economist forecasts that the NZD will be heading lower as the Federal Reserve raises rates.

The NZDUSD has already slid to the place we forecast yesterday. The pair is breaking down a support placed at around 0.72 which seems to pave the way for an extended decline even toward 0.7060. Source: xStation5

Looking beyond the RBNZ meeting, it needs to note a tremendous miss seen in the Chinese trade data. The second largest economy reported a $20.34 billion trade surplus missing vastly the consensus at $54.65. Imports were the major culprit as it surged as much as 36.9% yoy while just 10.6% had been anticipated. Exports grew 11.1% yoy slightly beating forecasts at 10.7% yoy. Why we got so huge disappointment? The Lunar New Year is the answer as it boosted imports substantially, continued gains in oil prices (up 21% in the last year) also contributed to some extent.

The China’s trade balance missed the consensus in the first month of the year. Source: Bloomberg

Finally, there was upbeat news from the US as Senate leaders reached a far-reaching bipartisan agreement yesterday allowing to add hundreds of billions of dollars to military and domestic programs over the next two years. It ends the cycle of fiscal showdowns that have roiled the Capitol of late.