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NZD Risk Ahead: RBNZ Rate Decision Tonight



NZD Risk Incoming: RBNZ Rate Decision Tomorrow


It could be a choppy overnight session down under, particularly for NZD. The currency is usually driven by themes such as global risk appetite and Chinese economic optimism, given the fact that it is New Zealand is a small, open economy with a high trade dependence on China.


However, domestic NZD fundamentals take centre stage in the early hours of tomorrow morning when the Reserve Bank of New Zealand release the result of their latest policy and interest rate decision.


As with other central banks, the time for emergency measures was back in March and April, when the Covid-19 outbreak caused global economic shutdowns.


In response to the pandemic, the bank slashed interest rates to all-time lows of 0.25% and introduced an NZD 60bln QE programme (the largest of its size in the worlds, as a proportion of the country’s total GDP).


Given the fact that New Zealand managed to control the virus VERY well (until today, the country had been virus-free for a stunning 100 days today), the economy was able to reopen swiftly and, thus, it appears as though the economic damage reaped by lockdowns will be far less than in other comparable developed market economies.


Indeed, since the June meeting, the macroeconomic data has come in significantly better than expected; namely, in Q2 2020 (the worst Covid-19 quarter of the year), total employment in the NZ economy dropped just 0.4%, less than expectations for a drop of 2%, and the unemployment rate stayed at 4%, rather than expectations for a rise to 5.8%.


Meanwhile, financial markets globally (and in New Zealand) remain calm. Therefore, the RBNZ really does not need to do anything at tomorrow’s rate decision.


But this does not mean that the RBNZ will not do anything.


You see the RBNZ really do not like the way that NZD has strengthened over the past four months. They see this strength as a risk to the country’s growth outlook, as it will make their exports comparatively more expensive.


Therefore, as they did back in June, the RBNZ is likely to again hit us with a very dovish message. They can tell us all about how the global growth outlook remains highly uncertain and the virus still poses significant risks, blah blah blah.

But we all know their primary concern is to check NZD strength (in fairness, they do admit to not liking NZD strength and say that it poses an economic risk).


Additional tools for hurting NZD used by the RBNZ might also be more threats that negative rates are coming (money markets already price in negative rates in mid-2021), that QE could be expanded, that the bank might finance government spending directly (something called debt monetisation, typically a big no no in modern central banking) and that the bank might start buying foreign assets (this requires selling NZD, so is a direct FX market intervention).

On QE, some are calling for the bank to potentially increase the size of their programme, or turn it into a yield curve control programme ala the RBA (who target 3-year government bonds at 0.25%).


The most likely outcome then of this meeting is a dovish combination of 1) admission that macroeconomic backdrop is not too bad but significant risks remain, 2) acknowledgment of displeasure with NZD strength and 3) threats of further monetary easing in the form of the above mentioned potential changes, or possibly even further easing at the meeting.


The above would hurt NZD. If they decide to take a more optimistic outlook, or follow the lead of the RBA and give up the complaining on NZD strength, we could see some serious NZD strength.

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