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With Rates Dropping Around the World Some Central Banks Hold

Aug 7 2019, 09:23 PM (BDT) |

The global economic slowdown is spreading - Asian central banks make startling rate cuts to sustain economic growth as production and export stress continues to build due to US-China trade war. 

Central banks all over the world are easing their monetary policy. The United States lowered their interest for the first time since December of 2008 when they cut interest rates from 1% to 0.25%. The current interest rate in the US is 2.25% which gives the US room for further easing to sustain their economy. 

The Eurozone, on the other hand, is not so lucky. Their monetary policy has been easing since November of 2011 when it was lowered from 1.5% to 1.25%. The ECB interest rate has been at a steady 0% since March 2016. 

Today, Wednesday, August 7th, Germany released its Industrial production figures at -1.5% which is an alarming whole percent worse than the forecast. Weaker foreign demand is likely the main reason for this weakness. This shows that Europe’s biggest economy is on a decline. Stuck between a rock and a hard place – as both the US and China are important export destinations. 

ECBs Mario Draghi stated in a press conference on July 25th that “a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term”.   The Eurozone’s options for “monetary accommodations” are mainly quantitative easing and lowering the interest rate into the negative zone. 

Australian RBA also lowered their interest rate in June and July – leaving the interest rate unchanged in August at 1%. 

What was really unexpected today by investors was New Zealand’s decision to cut rates by a whole 50bp to 1% - compared to the forecast of a 25bp cut.  According to their statement, the RBNZ Monetary Policy Committee agreed that a lower Official Cash Rate (OCR) is necessary to continue to meet its employment and inflation objectives.

The Reserve Bank of India followed suit by lowering their interest rate to 5.4% vs the expected 5.5% and then Thailand eased their monetary policy by 25bp. Which wasn’t priced in either.

As a reminder, lower interest rates are good for the country’s export, but bad for importing into the country. 

Looking at the currency pair NZD/CHF, the daily time frame shows us a move to the downside that initiated on July 19th. A big move down was seen today following a bigger than expected RBNZ rate cut, with the price reaching the lowest low the pair has seen since October of 2015 in the area of 0.62165. 

Fundamentally: the most important news from New Zealand and Switzerland are mostly behind us. On Monday better than expected Retail Sales were released in Switzerland and on Tuesday we saw employment growth in New Zealand. Today, red figures marked the economic calendar for NZD with the unexpected rate cut of 50bp. And on Friday we’ll keep our eye out on Swiss unemployment. 

Technically: On the 4HTF, we see that the price is currently below the 9 and 21 EMA. According to our Fibo levels, a retracement up may be possible with target levels of 0.63240 at Fibo 23.6 , followed by 0.63905 at Fibo 38.2 and the 0.64443 area is our 50% Fibo retracement. A further move to the downside can re-instate 2015 support levels in the area of 0.61086 – 0.61481.

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