Tomorrow at 9:00 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 events:
RBNZ kept a poker face last March
As widely expected, Wheeler and his gang kept their official cash rate (OCR) unchanged at 1.75% after cutting it to a new record low in November.
In its March statement, the RBNZ noted that while Q4 2016’s GDP is “weaker than expected,” the weaknesses are also “due to temporary factors.” There was no presser after the announcement, unfortunately, so we didn’t get deets on those “temporary factors.”
The central bank also talked about headline inflation, which has returned to the target band now that past declines in oil prices are out of the equation.
Consumer prices is expected to “be variable over the next 12 months” due to “one-off effects,” but is generally estimated to “return to the midpoint of the target band over the medium term.”
And what’s a policy statement without a lil’ jawboning, amirite? While the RBNZ recognized that the Kiwi’s “trade-weighted exchange rate has fallen 4% since February,” it also emphasized that “further depreciation is needed to achieve more balanced growth.”
Overall, the central bank believes that “monetary policy will remain accommodative for a considerable period” even as “numerous uncertainties” (read: Trump’s protectionist stance, Brexit, China’s debt concerns) remain.
No changes expected this time, but…
Market players aren’t expecting changes from the RBNZ this week, but that doesn’t mean that the announcement and presser will be non-events!
If we take cues from its last announcement, then we know that, along with global macroeconomic indicators and New Zealand’s GDP, the RBNZ is also closely watching the economy’s inflation, house price inflation, and the Kiwi’s trade-weighted index.
Thing is, most of these factors have IMPROVED since the March meeting.
Inflation jumped by a whopping 1.0% in Q1 2017 while prices rose by 2.2% from a year earlier. Even if we exclude volatile items such as tobacco and petrol, prices are still up by 1.5%. Meanwhile, inflation expectations for the next quarters also clocked in higher than their previous figures.
Even the Kiwi’s trade-weighted index turned in favor of the RBNZ as it fell by another 1.07% to 75.64 since the members’ meeting in March. In fact, the Kiwi’s weakness, along with higher dairy prices, likely contributed to the economy clocking in its first trade surplus since June 2016 last March.
Before you price in a hawkish stance from the RBNZ, though, you should also know that some of the central bank’s concerns are still valid.
Commodity prices have dropped left and right lately, which might hurt the economy’s headline inflation and support the RBNZ’s belief that the CPI will be “variable” over the next couple of months. What’s more, lower prices could weigh on exporters like Australia and China, which are New Zealand’s largest trading partners.
It also doesn’t help that global policy concerns are still plaguing the markets. Britain’s future is still a tossup with Brexit looming, while Trump has yet to ease concerns over triggering trade protectionism all over the world.
If you recall, Wheeler was particularly worried that higher tariffs would “lead to a very significant slowdown in global growth, higher costs associated with trade, reduced volumes of trade, and slower growth in the rest of the world.”
Last but not the least is New Zealand’s house price inflation, which registered its slowest growth in two years last April. While this is good news for the RBNZ, it also eases the pressure on Wheeler and his gang to tighten their policies.
Overall, analysts now expect the RBNZ to have a devil of a time striking a balance between recognizing improvements in New Zealand’s indicators while preventing traders from pricing in an earlier rate hike from the central bank.
Will NZD see volatility?
Last March the RBNZ was neither dovish enough for the bears nor hawkish enough for the bulls, so the Kiwi shot all over the place during the announcement and then mostly traded on its countercurrencies’ moves for the rest of the day.
If the RBNZ finds the right balance – as it did in March – between optimism and dovishness, then we might see another directionless day for the Kiwi.
But if Wheeler shares hints on possibly moving forward their rate hike schedule (market players are currently expecting a rate hike by late 2019), then we might see the New Zealand dollar shoot higher across the board.
Make sure you stick around during the release so you don’t miss out on possible trade opportunities!