Huddle up, Kiwi traders! The RBNZ is scheduled to announce their May monetary policy decision on May 8, 2:00 am GMT. Is a rate cut in order?
What happened last time?
Rate cut speculations for the RBNZ kicked into high gear in late March when the central bank shifted from a relatively optimistic bias earlier on to a more dovish one.
Any guesses when the March RBNZ announcement happened in this chart?
Policymakers blamed weaker domestic spending and slowing global growth for their downbeat stance, even as they agreed to keep interest rates on hold at 1.75% back then. Their official statement indicated:
“The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending. “
This was enough to send Kiwi bears into a frenzy, with some predicting that the first cut could happen in August while others went “Guess what? It’s gonna be May.”
Several market watchers also believe that one rate cut might not be enough for the RBNZ this year.
What might happen this time?
Markets seem to be pricing in a 0.25% interest rate cut for the upcoming RBNZ statement, yet there is still a possibility that the central bank could save this move for a bit later in the year.
Some factors that favor a rate cut sooner rather than later include downbeat Q1 2019 jobs and inflation figures, as well as resurfacing trade tensions between the U.S. and China.
Recall that the quarterly CPI fell short of estimates at 0.1% versus the projected 0.3% increase, keeping the annual rate at just 1.5% versus the 1.7% consensus.
It doesn’t help that the employment change reading for the same period showed a surprise 0.2% drop versus the projected 0.5% gain or the earlier 0.1% uptick. Even though the unemployment rate ticked down to 4.2% as expected, underlying data revealed that this was mostly due to folks dropping out of the workforce.
Now the RBNZ has already been worried about slowing global growth on account of trade tensions for quite some time, and U.S. President Trump put the pedal to the metal with threats of more tariffs on China earlier this week. That can’t be good!
Also note that the RBNZ took a small jab at the exchange rate in their previous statement, citing that the monetary policy shift among their trading partners has placed upward pressure on the Kiwi’s value.
On the flip side, one possible reason to keep rates steady for the time being could be the Q4 2018 GDP reading that came in line with expectations of 0.6% growth. For some, this reflected a slight pickup in momentum for the second half of last year, possibly reviving the growth outlook for the first half of 2019.
How might the Kiwi react?
As I often say, with greater expectations come the greater possibility of disappointment. Looking at recent Kiwi price action suggests that traders had been bracing themselves for more dovish remarks or an actual cut, which ups the odds of profit-taking or a “buy the rumor, sell the news” situation during the actual announcement.
Still, a decision to keep rates on hold while hinting that a cut is coming later this year could be enough to feed Kiwi bears. An actual 0.25% rate cut with the promise of yet another easing move later in the year could prompt even more bears to come out.
Just be mindful of additional volatility or possible spikes in either direction if you’re planning on catching pips during the event. If sharp moves ain’t your cup o’ tea, there’s no harm in waiting for the initial price reaction to play out then trying to hop in the longer-term action.
For reference, the last time the RBNZ cut rates was in November 2016. See how the Kiwi still extended its slide for at least a couple more weeks versus the dollar, Loonie, pound, and franc then?
Still, it could be a matter of picking the right counter currency, as the Kiwi did happen to reverse those losses against the yen and the euro in the weeks that followed.
Whichever way you choose to grab pips off the RBNZ announcement, don’t forget to practice proper risk management!