Fri, Jun 09, 2023 @ 01:07 GMT
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Decision Time for RBNZ; Potentially the Last Rate Hike?

With the market gradually preparing for a much-needed break due to the Easter festivities, the RBNZ will meet this week. The market is looking for another rate increase, but there is a widespread feeling that we are close to the peak of this hiking cycle. Inflation is still elevated, but the aftermath of Cyclone Gabrielle might have affected the RBNZ’s hawkish appetite. Could the kiwi be assisted by the RBNZ and continue its recovery against the US dollar?

RBNZ in the spotlight

At its first meeting for 2023 on February 22, the RBNZ announced a rate hike of 50 bps. The Official Cash Rate (OCR) stands at 4.75%, 450 bps higher than June 2021, when the first rate move was announced. Almost 40 days after the February meeting, the RBNZ is facing a different world. The banking sector woes appear to have somewhat affected the desire of central banks for further aggressive rate moves, despite elevated inflation. Luckily for them, we continue to see signs of headline inflation cooling off globally. But this is only half of the story as core inflation remains abnormally high and thus is the main concern among central bankers.

The domestic situation is also a difficult puzzle for Governor Orr et al to solve. The scarce indicators available to us, to monitor underlying price pressures in various sectors, continue to highlight that the RBNZ’s inflation problem remains at large. The downside surprise in the fourth quarter GDP most likely produced some smiles at the Monetary Policy Committee, but the strong retail sales and the record low unemployment rate are still troubling them. The RBNZ, at some stage, will really start to be concerned about second-round effects due to strong wages that would complicate even further the monetary policy outlook options.

The market is pretty confident about another rate hike 

The market is assigning a 90% probability for a 25 bps rate move at Wednesday’s meeting and a total of 49 bps rate hikes until July 2023. This is 25 bps lower than the February unchanged projected rate path by the RBNZ showing a peak of 5.5% in the second quarter of 2023. Considering the recent events, it seems unlikely that the RBNZ will make dramatic changes to its forecasts. A hawkish surprise could clearly inspire the kiwi bulls. In addition, during April we will get the RBNZ’s advice on amending its remit. Although it sounds like moving the goalposts amidst a game, the RBNZ has a history of remit revisions in its attempt to keep ahead of developments. Chances are that the current dual mandate of promoting price stability and supporting maximum sustainable employment will be maintained. However, we might see a more explicit comment about climate change that appears to disproportionately affect this island country.

What is next for the kiwi?

The kiwi managed to stay on the sidelines during the banking sector shenanigans and recorded a mixed monthly performance. However, it managed to outperform both its aussie neighbour and, more importantly, the US dollar. With New Zealand facing high imported inflation, some degree of the domestic currency appreciation might be desirable by the RBNZ.

The kiwi/dollar pair has been on an upwards path since the 2.5-year low of 0.5511 on October 13, 2022. It survived the February attack by the dollar bulls, and since the middle of March it has resumed its gentle upward move. The overall technical picture appears to favour the kiwi at this juncture, but the pair is hovering at a rather busy area. The relative tightening of the Bollinger bands and the convergence of the simple moving averages (SMAs) are signs that the biggest battle is yet to occur. Kiwi bulls would love a break higher towards the 0.6591 level and the RBNZ decision could offer significant assistance. On the other hand, a bearish show on Wednesday morning could prompt a retest of the 200-day SMA and the October 13, 2022 upward trendline.
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