Why the New Zealand dollar could rally on an RBNZ rate cut

Deutsche Bank sees a cut but not necessarily a fall in the kiwi

Deutsche Bank thinks the RBNZ will cut the OCR by 25bps at 2100 GMT today, but sees a risk that the MPS, whilst stressing downside risks, may project higher near-term inflation without assuming further easing, disappointing boosting the New Zealand dollar.

Deutsche Bank outlines 3 main reasons behind this view:

1) Yesterday's unexpected upward revision of the Q1 and Q2 CPI prints provides additional room for a wait-and-see tactic. The RBNZ might also draw confidence from 2-year inflation expectations remaining anchored just below 2%.

2) Overall, the RBNZ may take comfort from the exchange rate having caught up with rock-bottom export commodity prices.

3) In the June MPS, the RBNZ projected a sharp fall in immigration for the second half of the year. This has not materialized, as net migration reached a new record in June," DB writes.

"We would buy a potential post-RBNZ dip in AUD/NZD, also seeing as the AUD has possibly sold off too much in sympathy with Chinese stock markets," Deutsche Bank advises.

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