Tomorrow at 10:00 pm GMT the Reserve Bank of New Zealand (RBNZ) will publish its monetary policy decision for the month of May. What’s more, RBNZ head honcho Graeme Wheeler will conduct a presser an hour later!
Here are points you need to know if you’re planning on trading the event:
What happened last time?
As mentioned in my event review, the RBNZ kept its interest rates unchanged at 1.75% as markets as expected.
What market players didn’t expect was that Graeme Wheeler and his gang would be so chill about the Kiwi’s strength.
See, Kiwi’s trade-weighted index (TWI) was above 78.00 when the RBNZ made its policy decision, which is higher than the 76.00 levels that they had forecasted. However, the RBNZ statement only stated that
“…exchange rate has increased by around 3 percent since May…A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.”
The RBNZ had a more aggressive tone in March when it said that (emphasis mine)
“…exchange rate has fallen 4 percent since February…This is an encouraging move, but further depreciation is needed to achieve more balanced growth.”
The central bank also downplayed the economic slowdown in Q1 2017, only saying that it was “lower than expected” but that “growth outlook remains positive, supported by accommodative monetary policy, strong population growth, and high terms of trade.”
Since markets were expecting a bit of jawboning from the RBNZ, the chill vibe towards a strong Kiwi and its optimistic tone pushed the New Zealand dollar higher where it stayed for the rest of the day.
What are traders expecting this time?
Market players are pretty unanimous in predicting no changes to the RBNZ’s 1.75% interest rates this month.
With that, many traders will closely look at the central bank’s tone. Here are a couple of considerations to think about:
Lower growth and inflation numbers
A couple of months ago the RBNZ had already predicted that the sharp increase in inflation was temporary. However, Q2 2017’s inflation figures have underperformed even the central bank’s conservative estimates.
The RBNZ doesn’t look like it would worry about growth, though, as leading indicators still point to a pickup in Q2 2017 after a worse-than-expected reading in Q1 2017.
Stronger exchange rate
Kiwi’s TWI fell below 78.00 to stand at 77.71 today after traders started to price in a dovish statement from the RBNZ this week.
Take note that the level is still above the central bank’s 76.00 forecasts for Q2 and 75.80 expectations for Q3. This is bad news for New Zealand’s exports, which already felt the pain of a stronger currency in June.
RBNZ’s Survey of Expectations
A closely-watched survey by the RBNZ revealed that businesses are now expecting lower inflation for the next year or two. Expectations of inflation in one year’s time dropped from 1.92% to 1.77%, while two-year inflation expectations also dipped from 2.17% to 2.09%.
As if that’s not pressure enough, the survey also reflected that businesses have downgraded their forecasts. Annual growth is now expected at 2.75% (from 2.81%) a year from now while growth is upgraded from 2.58% to 2.64% in two years’ time.
Last but not the least is the expectations for Kiwi’s levels. The New Zealand dollar is expected to be at .7100 by the end of December, up from .6900 in the last survey three months ago.
Graeme Wheeler’s last decision as RBNZ head
That’s right! Wheeler will make his last decision as RBNZ’s head honcho before he steps down on September 26.He will be replaced by Deputy Governor Grant Spencer for six months until leaders elected in the September 23 elections find a replacement.
With growth, employment, and inflation underperforming and Kiwi trading higher than the RBNZ has forecasted, analysts predict that the central bank will strike a more dovish tone than in its June statement.
It can’t afford to rock the boat too much, however, especially since leading indicators still point to a decent growth in Q2; Kiwi has seen significant retracements, and Wheeler won’t want to end his term with a bang (or will he?)
A more likely scenario is that the RBNZ will keep its rates steady while making a comment or two about the strong Kiwi.
If it’s feeling a bit more dovish, it could also delay its rate hike schedule from September 2019 to sometime in 2020. This is bad news for rate hike junkies who have priced in a hike in mid-2018.
But if Wheeler and his team decide to keep rates AND their forward guidance unchanged, then we might see more rally for the New Zealand dollar. Just make sure to watch out for potential inflection points in case the rally doesn’t have enough momentum!