NZD traders are now turning their focus to tonight’s RBNZ rate decision, which takes place at 0300BST.
No big policy changes are expected, with rates seen staying at 0.25% and the bank’s QE programme seen unchanged in size at NZD 60bln. Thus, focus will be on the tone of the meeting.
The RBNZ has reason to be more optimistic than at its last meeting; quarantine restrictions in the country of New Zealand are now the least strict in the G10 (according to the Oxford COVID-19 Government Response Tracker”). Meanwhile, recent macroeconomic data (retail sales and Q1 GDP) have surprised to the upside.
Moreover, though RBNZ Governor Orr has been clear not to rule out any policies (including negative interest rates, which are now priced for 2021), the improvement in financial market conditions has meant that the RBNZ has been able to ease back a little in terms of its QE purchases.
The main barrier to a more optimistic RBNZ at tonight’s meeting might be the bank’s aversion to a stronger currency (which for an export-oriented economy such as New Zealand, hinders its recovery).
ING point out that “NZDUSD has appreciated by 7% since the latest RBNZ meeting (13 May), moving back to pre-pandemic levels, as the NZD followed the big rally in global risk assets. If a rebounding NZD was creating some mild concern in May, the current level makes it virtually impossible for the RBNZ not to input the currency in their monetary policy function (albeit implicitly).”
Therefore, the bank suggests there is a risk that the Bank might choose to reiterate that a leap into negative rates next year remains on the table, despite improvement in the macroeconomic backdrop.
Whether a deliberately dovish message like this would trigger the desired, weaker NZD outcome is another thing, however.
Given the way GBP reacted to the last BoE and EUR to the last ECB meetings, FX markets appear to have shifted to a mindset of “more stimulus is better for the economy, thus good for the currency”, rather than the traditional mindset of “more stimulus is going to lower interest rates, this triggering outflows from the currency as investors chase higher yields elsewhere”.
Thus, if the RBNZ come across as a little more optimistic on their outlook, thus reducing the perceived probability of negative rates or a QE increase over the next 12 months, NZD may react negatively (rather than positively, as would normally be the case with a more hawkish central bank).
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