Tomorrow at 9:00 pm GMT the Reserve Bank of New Zealand (RBNZ) will publish its monetary policy decision for the month of August.
What’s more, RBNZ top boss Graeme Wheeler is also scheduled to conduct a presser an hour after the release.
Will the central bank follow the BOE, RBA, and BOJ’s footsteps and implement easier policies this month? Here are points that you need to know before you trade the event:
The last policy decision was in June
As in before Brexit even happened. In its last statement, the RBNZ was all flowers and unicorns over the economy. Not only did it keep its rates at a steady 2.25% when many were expecting a rate cut, but it also UPGRADED its inflation projections on the assumption that the RBNZ’s low rates, expected increases in oil prices, and Kiwi’s projected decline would all work to push New Zealand’s consumer prices higher.
A rate cut is a done deal
Well, at least for most market players. Back in June, Wheeler qualified that the RBNZ could cut its rates at least one more time this year depending on New Zealand’s economic conditions.
Unfortunately, the odds hadn’t turned in the RBNZ’s favor. Here’s a checklist for why the central bank will likely cut its rates to a new record low of 2.00% this month:
- Oil (and other commodities) prices have NOT risen to push inflation higher.
- Heck, inflation simply has NOT risen higher since the RBNZ’s last estimates.
- The RBNZ’s low rates haven’t made much impact on economic activity.
- Expectations of a Fed rate hike have NOT dragged NZD/USD lower. In fact, Wheeler has explicitly said that Kiwi’s strength is already making it more difficult for the RBNZ to meet its inflation targets.
- The RBNZ is tightening its mortgage lending restrictions, which means that it could cut its rates without worrying that the cut would accelerate New Zealand’s housing bubble.
- The RBNZ has changed its tune. Back in June, the central bank believed that “further policy easing may be required.” But in its update three weeks ago, the RBNZ printed that “it seems likely that further policy easing will be required.“
RBNZ would need more than a rate cut
Take it from the Bank of England (BOE) and the Bank of Japan (BOJ). With so many signs pointing to a rate cut, a lot of traders have been placing their bets for days (or even weeks).Right now swap prices are reflecting a rate cut this week AND in November, while the Kiwi has been falling (and recovering) against its major counterparts since the RBNZ published its adjusted economic projections last month.
This is why the RBNZ will likely need more than a rate cut in order to drag the Kiwi lower. Aside from an already priced-in decision, a 2.00% interest rate is still high compared to the other major central bank rates.
This means that, unless the RBNZ has more cards up its sleeve, then forex yield hunters will still choose to buy the Kiwi like Pokemon trainers choose Squirtles over Bulbasaurs.
If Wheeler wants a lower exchange rate, he would need to take a leaf from the BOE’s book and hint at further rate cuts, if not introduce other stimulus programs altogether. The RBA and BOJ have both chosen the conservative path and limited their policy changes and both ended up with stronger domestic currencies at the end of the day. In a nutshell, meeting market expectations is no longer enough in a world of easy monetary policies.
The priced-in bit of the RBNZ’s decision will make trading the Kiwi a bit trickier this month. If Wheeler and his gang stop at one rate cut, then we’ll likely see a relief rally that would boost NZD higher across the board.
On the other hand, hints of dovish biases, further rate cuts, or stimulus programs down the road could renew the bearish bias on the New Zealand dollar and drag it lower against its counterparts.