Four questions on the RBNZ:
1- 25bp or 50bp? "While most, including our economists, expect a 25bp cut, rumblings of a "front-loaded" 50bp cut have increased. The most compelling argument for this is if the RBNZ is certain it needs to cut rates further this year, why wait? We believe there are three good reasons for them to hold off on a 50bp cut this week," BofA answers.
2- Weak or strong forward guidance? "Moreover, we think it is unlikely the RBNZ's forward guidance will be materially strengthened. The RBNZ would benefit from some constructive ambiguity in its communication that allows it to be both flexible to incoming news, as well as allows scope to surprise markets," BofA argues.
3- Will the RBNZ change its language on FX? "The RBNZ has consistently referred to the exchange rate as unsustainable and unjustified; could the sharp drop in the NZD alter this view? In our view, it will not," BofA projects.
4- Is short NZD a crowded position? "Both our own flow and CFTC data suggest bearish NZD is among the most crowded positions in the market...We square this circle by positing that while short-term speculative investors (captured by hedge fund flows and CFTC data) are certainly short NZD, the broader investment community, especially real money investors, are probably not, especially given the speed of the depreciation," BofA notes.
Market implications - the waiting game. "The bottom line from our discussion is there are short-term upside risks to NZD from a less dovish-than-expected RBNZ, but any correction should be limited if the RBNZ maintains its firm weaker bias for the currency," BofA concludes.
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