NZ Treasury, budget, RBNZ and Fed hint on weakness in NZDUSD.

We still expect NZD/USD to weaken as NZ/US monetary policy diverges.

Furthermore, RBNZ doesn’t really seem to have eased their economy by reducing 25 bps OCR in last month end or it may take time to factor in this monetary policy decision as GDP (q/q), GDT price index, manufacturing PMIs have reduced considerably and unemployment rates have increased on the other side. Market pricing assigns a 50% chance of the RBNZ cutting on 9 June.

A recovery in export prices (and the terms of trade) would reduce the central bank’s sensitivity to the currency, support domestic incomes and help an eventual NZD recovery. 

There were few surprises in the Budget.

The Treasury is forecasting very strong economic growth, large surpluses, falling net debt and low bond issuance.

We are sceptical. From 2018 the economy may be weaker than the Treasury is forecasting due to the wind-down of the Canterbury rebuild and a cooling of the current borrow-and-spend dynamic.

Furthermore, this Budget made no allowance for tax cuts. In reality, tax cuts are a possibility.

The policy announcements in today’s Budget were generally modest, and looked sensible to us.

The stronger fiscal position, and a renewed focus on debt reduction, has led the Government to slash its gross bond issuance programme by $8bn over the four years to 2020.

Inference:

Previously, the gross bond issuance programme was forecast to be $9bn a year for 2016/17 to 2019/20, but this has been cut to $7bn a year which indirectly would mean that even if RBNZ reduces OCR there is blockage fund inflow via slash in bond issuance programme which is likely to impact adversely on NZD.

To substantiate our bearish stance, in OTC FX , IVs over longer tenors are stabilized with positive skews on OTM strikes, as you can observe.