The main risk for the NZD is that the RBNZ do not confirm the more bullish outlook that markets have been pricing in. The recent COVID-19 case in Auckland overnight also makes that more likely now. Inflation for New Zealand is above the bank’s forecast and labor data is robust with the last unemployment print coming in at 4.0% vs the 4.5% expected. All of this meant that ANZ, ASB, & BNZ all expect the RBNZ to raise their official cash rate to 1.00% by year-end. That is implying a hike at the August, October, and November meetings. That is a very bullish outlook and one the NZD has not perhaps been fully believing.
Take a look at the NZD vs other currencies
In the chart below the NZD is in purple. From the start of the year, the NZD has shown that it is in the middle of the pack when compared to other currencies. That is hardly a run-away move higher than you would expect with the OiS futures pricing in a 100bps rate hike in 12 months.
Slightly better from the start of August…
However, there has been strength in the NZD since the start of August, so these bullish reasons for sentiment are not being totally ignored.
What does this mean?
- The risk is that the RBNZ do not confirm a bullish stance and the NZD strength in August finds itself being retraced
- If the RBNZ confirm 3+ rate hikes coming into the year-end, then the NZD still has room to fly higher.
- Looks like a great event to trade as there is scope for both gains and falls in the NZD depending on the RBNZ’s stance.
- The new COVID-19 case now means that the RBNZ are less likely to be hawkish.
Pairs to trade: NZDJPY, EURNZD, and AUDNZD. Any failure in the RBNZ to maintain the right hawkish stance and the bar is quite high, then EURNZD longs to look quite easy to manage risk with stops sub 1.66500. This would be if they only project one more rate hike into year-end. The base case is for three 25 bps hikes this year. Quite a high bar. Remember too, that if the RBNZ failed to hike at this meeting that would be a great opportunity as well. GBPNZD is also worth considering.
The main point to realise here is that the NZD”s path will be all about the RBNZ’s monetary policy stance coming from the meeting. So, be sure to be paying attention!