Rounding up this month’s batch of monetary policy announcements is the Reserve Bank of New Zealand (RBNZ), which will publish its decisions tomorrow (September 27) at 8:00 pm GMT.
Think you can grab a few pips from the event? Here are some points that might help you strategize for your trades:
What happened last time?
As mentioned in our August statement review, Governor Graeme Wheeler and his gang kept their interest rates unchanged at 1.75% as expected.
The central bank also made changes to its growth and inflation estimates.GDP forecasts in 2017 were largely unchanged but low interest rates; “rapid” population growth; high terms of trade; fiscal stimulus outlined in Budget 2017, and recovery from weak GDP readings in late 2016 and early 2017 convinced the RBNZ to upgrade its growth outlook for 2018 and 2019.
The central bank wasn’t feeling as confident about inflation. Though prices still remain “within the target range,” they’re also expected to “decline in the coming quarters” as the effects of higher fuel and food prices roll out of the equation.
The silver lining is the non-tradables (read: goods that are for immediate consumption like food and rent) inflation is expected to increase due to “above-trend GDP growth and an associated rise in capacity pressure.”
What really caught market players’ attention, though, is the RBNZ forgetting to take a chill pill on Kiwi’s strength. If you recall, the central bank toned down it jawboning in August by saying that “A lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.”
But in the September meeting, RBNZ stepped up its game and said that “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.” Yipes!
RBNZ’s stronger feelings over a strong currency; Wheeler sharing that “we don’t see the OCR increasing” in the foreseeable future and hinting that they’re open to currency intervention, and overall risk aversion all helped in cancelling out NZD’s post-event gains in the succeeding trading sessions.
What are traders expecting this time?
Much like in the previous month, market players see the interest rates remaining at 1.75% for another month in September.
That doesn’t mean that the event will be a non-mover, though! Here are a couple of issues that could come up during the release:
Lower growth and inflation numbers
As mentioned in our latest New Zealand economic snapshot, the latest growth and inflation numbers came in weaker than what the RBNZ expected in its August estimates.
If you recall, RBNZ was partly counting on higher dairy production volumes, high level of building consents, and optimistic business trends to help prop up prices and the economy.
Since then Q2 GDP came in weaker than expected; lower dairy exports and higher fuel prices dragged on New Zealand’s goods trade balance, and residential building permits and housing prices showed weaknesses.
Kiwi’s trade-weighted index (TWI) stood at an average of 77.08 in August, which is already weaker than the RBNZ’s 78.5 estimates for the end of Q3.
And thanks to data misses, risk aversion, and teeny tiny concern about national leadership after last weekend’s elections, NZD’s TWI now stands at 76.08. Question is, is that low enough to keep RBNZ off the bulls’ backs?
Unless you were too busy confirming whether or not Kylie Jenner is indeed pregnant, then you should know that New Zealand just held an election over the weekend.
And while the National party won the most votes as expected, the opposing Labour party hasn’t thrown the towel yet. The race to form a coalition is on and market players will likely stay away from the high-yielding Kiwi until the issue is resolved.
Graeme Wheeler said his goodbyes as RBNZ Governor today and Grant Spencer – who was Deputy Governor and Head of Financial Stability – will take over for the next six months or until the next government makes a permanent appointment.
Some analysts say that Spencer is unlikely to announce any new policies on his first week, pointing out that the former Deputy’s biases are mostly in line with Wheeler’s anyway.
For now, it looks like the odds are stacking in favor of the RBNZ keeping its policies unchanged for another month. However, other factors, such as the central banks’ bias towards Kiwi’s current levels, inflation risks, and New Zealand’s political scene could still provide volatility for major NZD pairs.
If the RBNZ continues to call for a weaker Kiwi or hint of possible currency intervention down the road, then NZD could see further selling.
But if Grant Spencer and his new squad choose to play the waiting game and backs away from jawboning their currency, then we might see a bit of rally after the previous days’ selloffs.