The Reserve Bank of New Zealand decision is due at 2100 GMT (5 pm ET) and there is little drama in the outcome. All 17 economists surveyed by Reuters expect a hike to 3.00% from 2.75% and the OIS market sees a 97% chance of a hike. But the reaction in the FX market is more complicated.
It will be the second hike this year after a long period at 2.50%.
RBNZ interest rate history
The previous rate hike came on March 13 and set off a round of New Zealand dollar buying.
NZDUSD hourly
The hike in March was one of the most telegraphed interest rate raises in central bank history so that wasn’t what kicked off the rally. Instead, it was hints of further hikes in the statement the sparked NZD/USD.
Specifically, it was the RBNZ forecasts. The 90-day interest forecast was raised by 23bp for December 2014. The RBNZ also projected terminal rate of at least 5% in 2017, compared to the market which priced in a 4.50% terminal rate.
Governor Wheeler has been transparent in saying he expects the key rate rising about 200 bps in two years. The market is unclear on the timing with OIS traders pricing in 109 bps in hikes in the next 12 months (including today). Before the CPI numbers, about 118 bps were priced in.
In other words, 3 more rate hikes are priced in but the probability of a fourth has fallen to 36% from 72%. There are 7 meetings scheduled in the year ahead.
The market will be most-focused on the next meeting, which is in June.
Wheeler said the speed and magnitude of hikes will depend on data and the latest numbers severely diminish the chance of a hike in June. First quarter CPI numbers released last week showed just a 1.5% y/y rise compared to 1.7% expected.
New Zealand CPI y/y
The latest poll showed 14 of 17 economists expecting a hike in June but that was taken before the CPI data.
The other concerning development has been falling milk prices. Export numbers remained strong in February despite the strong NZD but global dairy prices are down 20% since early February and that’s New Zealand’s major export product.
Even with a slightly less hawkish outlook it will leads to a parade of rate hike expectation downgrades from economists and that will keep a lid on NZD.
Last week, Morgan Stanley recommended selling the pair at 0.8620 with a target of 0.8100 and a stop at 0.8700. I like that trade and so far it’s been moving in the right direction with NZD/USD trading at 0.8582.
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