RBNZ Rate Preview – A Hint of Hikes to Come?

In the first three quarters of 2010, the Reserve Bank of New Zealand (RBNZ) raised interest rates twice, following the footsteps of Australia’s aggressive rate hikes. But towards the end of last year, the hikes came to a screeching halt as employment problems and high levels of foreign debt painted a not-so-sunny outlook for New Zealand’s economy.

What about this year? Will we get our first taste of a 2011 rate hike tomorrow?

I wouldn’t bet on it, not with New Zealand’s latest quarterly GDP report printing an unexpected 0.2% drop from Q2 to Q3 2010. Let’s not forget, there are also concerns over further monetary policy tightening in China. And on top of that, the economic impact of the Australian floods is threatening to spill over to New Zealand.

If you ask me, the future looks just as cloudy now as ever, and the RBNZ will probably be careful not to choke off the economy’s recovery with an ill-timed rate hike. This is why I believe that the RBNZ will likely take the popular “wait-and-see approach” that central banks seem to be so fond of these days.

But that doesn’t mean we won’t see a rate hike anytime soon. Rising inflation presents a strong case for an interest rate increase in the not-so-distant-future… just not tomorrow.

Ah, inflation, the force behind rising prices that has a subtle yet hard-hitting impact on the economy, as it directly affects central bank monetary policy decisions.

Last week’s CPI report showed that inflation grew by 2.3% last quarter, bringing year-on-year inflation in 2010 to a smoking hot 4.0%. Apparently, the Emissions Trading Scheme tax and Goods and Services tax, which were implemented at the start of the 3Q and 4Q 2010 respectively, helped boost prices higher. Digging deeper, we also see that transportation costs rose by 4.3%, while food prices inched 2.3% higher.

The question is, can the RBNZ keep inflation in check? Take note that the RBNZ’s stated target inflation band is 1.0%-3.0%. With recent data showing that inflation is creeping higher, perhaps we’ll see a RBNZ official hint of a potential rate hike sometime down the line.

Now let’s talk about how you can make pips out of RBNZ’s holler.

As my homie Big Pippin’ pointed out in his chart art yesterday, we see NZD/USD just chillin’ at support at the .7600 handle. Looking at how the pair behaved during the rate hikes we saw in 2010. The RBNZ’s decision tomorrow could be a make-or-break event for the Kiwi!

 NZD/USD Chart

NZD/USD started its uptrend in June 2010 when the central bank raised rates for the first time in almost three years from 2.50% to 2.75% and hinted that more hikes were on the horizon.

RBNZ Governor Alan Bollard announced another 25 basis point-increase to 3.00% in July. However, the pair fell short of trading past the resistance at .7350 because the accompanying statement implied that the RBNZ wouldn’t be raising rates any time soon.

I guess Bollard was serious, as he and his buds maintained the official cash rate for the rest of the year. Consequently, this kept the Kiwi from trading higher except for the widely-expected pause in October when the Kiwi was able to gain amid the dollar’s weakness.

With that said, make sure you keep an ear out not only for a rate hike but also for what the RBNZ has to say and what’s up with the dollar! You can also check out our Facebook and Twitter pages to see what other traders think of any potential trade the news plays.

Even if we don’t see another 25-basis point increase, a couple of hawkish comments could send NZD/USD up to .8000!