By Orbex
We could see some volatility in NZD pairs later in the Asian session around what is probably the most important and market-moving event of the month: the RBNZ’s monetary policy decision and subsequent statement.
Here’s a look at what’s going on in the markets and what we might expect for the event.
The interest rate decision is expected at 02:00 on Wednesday CET (or 20:00 on Tuesday EST), but the broadest consensus is that the bank will keep rates steady at 1.75%.
Where we’re likely to see change is an hour later when Governor Orr holds a scheduled press conference. The Governor is expected to give a more dovish outlook for the currency, something in line with what we saw from Australia last week.
There are even some analysts who are speculating that the RBNZ might try to outdo the RBA in a swing towards a softer stance.
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In order to understand how the market will react to this, it’s best to get a handle on why analysts and investors are expecting the change in stance.
Firstly, the more straightforward explanation is that New Zealand and Australia have a strong economic connection, and their currencies often move in tandem. In addition, economic issues in Australia are typically mirrored in New Zealand.
The RBA has recently softened their tone because of underperforming data releases due to the housing slump, trade issues, and the lack of growth in China.
Although New Zealand seems to have avoided the housing price slump, for now, they are still open to be indirectly affected by ongoing trade concerns. Not to mention, domestic economic data has been disappointing of late, as we’ve previously discussed.
The latest GDP data hasn’t been released yet, but from performance through other indicators, it doesn’t bode too well.
Inflation is still just below the target rate, registering 1.9% in the last couple of months. Tourist arrivals are up, but so is unemployment. This is showing a bit of a disconnect because even though businesses are anecdotally reporting that it’s hard to find workers, wages aren’t going up. They only increased by 0.5% at an annual inflation-adjusted rate.
Last week we saw a drop in the NZDUSD which coincided with the release of employment data. Some analysts are attributing this drop in pricing to an expectation of a dovish tone from the RBNZ, and a direct response to domestic data. However, this was also after the RBA’s policy decision and the more dovish tone it adopted during its press conference.
If we work under the theory that the market has been pricing in a dovish tone, this would imply that should the RBNZ stay pat on the interest rate and mirror the RBA in outlook, there could be something of a “relief” rally to the NZDUSD.
This is what some analysts are projecting. With such a broad consensus that the bank will have a more depressed outlook, the bears could have pushed out the bulls over the last couple of days. However, when the data comes out, the only traders left will be the more optimistic ones.
Another reading is that the NZD is moving in line with the AUD due to a combination of data and export outlook that is pushing both currencies back into the downward trajectory they’ve had since November. The trajectory was interrupted by the sudden rise in iron ore prices two weeks ago.
This would imply that a dovish tone is not as priced in as analysts think, and we could see the NZDUSD take another leg down in response to a more dovish tone.
Of course, there is still the much less likely scenario that the bank doesn’t change its stance at all. After all, NZ data, while less than stellar, is still performing better than its largest neighbor.
Orr might judge that the currency can wait a month to the next meeting. This would likely send the NZDUSD rocketing upwards.
The even less likely scenario is that the outlook is so depressing that the bank comes out and cuts the rate to 1.50%, which virtually no one is expecting, and that would lead the currency to collapse.
By Orbex