What's priced in for the RBNZ decision tomorrow?
Markets are not expecting a rate cut by the New Zealand central bank
But can the RBNZ afford such a move?
Despite more risk-off sentiment in markets today, the kiwi is among the better performers alongside the yen amid cross flows against the aussie. Part of the market chatter today is that the flows are coming as the RBNZ is seen holding rates steady tomorrow and the OIS market pricing only reflects a ~20% probability of the RBNZ cutting the OCR.
But with the Fed now all but certain to cut rates in July, therein lies the danger of other major central banks not following down the same path. Should the RBNZ choose not to cut rates tomorrow, they will have to send a dovish message to markets to price in stronger odds of a cut in August or risk getting punished by a stronger kiwi exchange rate.
Considering how fragile global economic developments are right now and how almost all major nations are struggling with their inflation battle, no central bank can afford to let their currency strengthen too much or risk losing further credibility.
And that narrative is even more so crucial now as the Fed and Trump has convinced markets somewhat to turn their back on the dollar.