Just when it seems like major central banks have already had their say in the past couple of weeks, the Reserve Bank of New Zealand is just gearing up to make its policy announcement. Here are a few things to keep in mind if you’re planning on trading this top-tier event.
1. Numbers aren’t looking too good.
In case you missed it, I’ve rounded up the latest batch of reports from New Zealand in my Economic Snapshot to give y’all a picture of how it has fared since the last RBNZ statement. Performance hasn’t been all that impressive in the past few months as the economy chalked up a meager quarterly GDP growth of 0.4%, which is its weakest reading in more than a year.
To top it off, New Zealand’s trade activity is showing signs of slowing down as the deficit widened from $36.22 million to $284.72 million during the January period due to a 10.8% slump in exports. This erased a huge chunk off the 13.2% gain seen in the previous month.
On a less downbeat note, quarterly CPI was better than expected at 0.4% in Q4 versus the earlier 0.3% uptick. This brought the annual rate up to 1.3%, which is still a few notches away from the central bank’s 2% target but is advancing nonetheless. However, components of the report revealed that the pickup was merely due to an increase in transportation costs and home prices while food items still indicated a sharp drop.
2. Switched to neutral bias last time
In their February policy statement, RBNZ head honcho Wheeler mentioned in the presser that they have adopted a neutral policy stance compared to their easing bias in late 2016. He did clarify that there’s an even chance of the OCR going up or down, something that he reiterated in a more recent testimony at the beginning of this month.
Last month, their decision to keep interest rates on hold at 1.75% was due to the unusual persistence of weak tradables inflation and the need to boost capacity pressure to contribute to non-tradables inflation. At that time, the RBNZ kept their growth and inflation forecasts mostly unchanged, citing that there are still plenty of uncertainties on the horizon.
Among uncertainties the RBNZ highlighted are the upcoming Brexit, Trump’s protectionist policies, and China’s debt positions. In particular, Wheeler pointed to the U.S. withdrawal from the Trans-Pacific Partnership or TPP as a potential risk, not just to New Zealand, but to the entire global economy.
3. TWI sliding lower than projected
If you’ve been keeping up with RBNZ announcements, you’d probably know that the Kiwi’s TWI or trade-weighted index is one of the central bank’s closely watched indicators. You see, Governor Wheeler usually stresses the need for a lower exchange rate so that New Zealand can benefit from stronger export demand and upside pressure on domestic price levels.
In his usual jawboning fashion, Wheeler noted in their February statement that the Kiwi’s exchange rate remains higher than sustainable for balanced growth and generates negative inflation in the tradables sector, concluding that a decline in the Kiwi’s levels is needed. Around that time, the TWI advanced from 77.7 in December to 78.95 then, which meant that the currency appreciated against its peers.
The RBNZ also projected that the TWI might keep rising to 79.0 by March this year, so they’d probably be more than happy to note that this wasn’t the case at all. Instead, the TWI slipped to 76.49 as of March 20 to reflect depreciation against a basket of 17 other currencies. If this is enough for Wheeler to ditch his jawboning spiel, Kiwi bulls could charge on lower expectations of easing or currency intervention.
4. Long-term positive outlook?
It remains to be seen whether Wheeler can keep up his cheery mood in his recent testimony or acknowledge that the economy is still facing a lot of headwinds. He previously talked about how New Zealand is in the middle of a strong broad-based expansion and that there is upside potential stemming from migration and commodity prices.
Wheeler did mention some concerns from the housing market and the risks of a property bubble so the pickup in prices could weigh on their outlook as well. Either way, it could all boil down to how he addresses these concerns and brushing ’em off as minor setbacks could leave room for some upside for the Kiwi.