RBNZ meet June 9 - Westpac tip an on hold decision (then cut in August)

Hot on the heels of HSBC forecast RBNZ will remain on hold at their June meeting

NZD Into Next Week's RBN

The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 9 June. At the 27 April meeting, the RBNZ kept its policy rate unchanged at 2.25% and signalled that further rates cuts were likely, saying “further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”

Although we think the decision will be a close call (and the consensus agrees with 7 out of 15 economists expecting rates on hold), we believe that, ultimately, concerns about renewed strength in the housing market and decent domestic data will matter more than the weakness in inflation and inflation expectations, and the strength of NZD and that the RBNZ will leave its policy rate unchanged.

Because of the RBNZ’s focus on inflation, we believe that the most likely timing for the next rate cut will be at the August meeting. This would allow the central bank to have the CPI data for Q2 at hand and to have devised new measures to cool the housing market.

The publication of the Monetary Policy Statement (MPS) at next week’s meeting raises the likelihood of policy action, as it provides a communication opportunity to make the case for the policy decision and the RBNZ has proven in the past that it likes to change policy at a meeting that coincides with the release of the MPS. We believe the RBNZ could lower its forecast for growth and inflation slightly as a result of the continued strength in NZD.

There is currently little priced in for next week’s meeting, about 8bp is currently priced in. This means that, if the RBNZ keeps rates on hold but continues to signal openness on cutting later this year, the impact on the currency is likely to be small. However, if it decides to surprise and cut, NZD would likely depreciate meaningfully, given its recent strength and positioning.

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AUD/NZD: Aussie Marches Higher Before RBA Decision

Traders were bullish on the aussie versus the New Zealand dollar on Monday, with rising oil prices giving the Australian currency an advantage ahead of the Reserve Bank of Australia's (RBA) cash rate announcement on Tuesday.

Oil futures got a late boost on Monday, with West Texas Intermediate climbing more than 2% to $49.73 per barrel and Brent crude rising 1.8% to $50.54 per barrel, amid reports militants in Nigeria had attacked oil lines and as the weaker US dollar continued to support the commodity.

Stronger oil prices gave the Australian dollar a greater edge over the kiwi, with Australia a much bigger oil producer than its neighbor.

The AUD/NZD cross rose 0.58% to $1.0636 on Monday afternoon in New York from $1.0575 at the start of the trading week in Asia on Monday morning.

Trading The RBNZ: Views From 7 Major Banks

BofA Merrill: We think there is a stronger case for the RBNZ to ease than the 25% currently priced.

In our view, it should be at least 50/50. The RBNZ has a stronger easing bias and is under greater pressure to weaken the currency. The NZD Trade Weighted Index (TWI) has not weakened to the same degree as the AUD over the past three years. The correlation between the cash rate differential and the spread between the AUD and NZD TWIs is 0.70 over the past 10 years, but is 0.92 since 2010.

Consistent with our rates view, we believe AUD/NZD is getting close to levels where it would present an attractive buying opportunity.We remain on the sidelines ahead of the central bank decision. But a drop in AUD/NZD towards its range lows of 1.05 if the RBNZ stays on hold would likely present good risk-reward for entering longs.

Morgan Stanley: The RBNZ is skewed to cut: Inflation expectations have fallen to lows last seen in the 1990s and the NZD TWI is trading 4.8% above the RBNZ’s September forecast. The RBNZ is one of a few central banks that can actually weaken its currency via rate cuts as it has a fairly steep yield curve and the highest starting monetary policy rate. We think the risks are high for a cut this week and if not now then pre-announcing a cut at the August meeting.

The main opposition comes from the fact that house prices are rising rapidly as a result of migration (6.5%Y nationally), which cutting rates could spur further, adding to household debt. We would expect macro-prudential policy to ease the financial stability risks, but what is more worrying to us is the continued negative cash flows in the dairy industry.  Lower interest rates could help to ease the burden on this sector, so we reiterate our trade of the week: short NZDJPY.

Barclays Capital: Our forecast for the RBNZ is for a 25bp cut in the OCR to 2.00%. With house prices showing some accelerated gains, the RBNZ’s June meeting has become an increasingly close call. Consensus is split, with around half of the analysts polled by Bloomberg, including Barclays, forecasting a cut. However, markets have not priced in an easing at this meeting. We marginally favor a further move by the RBNZ in order to help the struggling dairy industry and support the low level of inflation expectations while imposing more macro-prudential measures to cool property market gains. Indeed, dairy prices continue to fall, a factor that is also likely to continue to weigh on NZD. If we are correct about the RBNZ, NZD could face downward pressure given the lack of market pricing and split consensus.  

Citi: The central bank is not likely to lower interest rates and the meetings may ultimately prove low stakes for currency markets

Given weakness in AUDNZD and strength in trade-weighted NZD, there is probably more incentive for the RBNZ to strike a dovish tone, but we doubt the meeting will mark a major break in investor expectations.

Nomura: The Reserve Bank of New Zealand (RBNZ) holds its next policy meeting on 9 June. At the 27 April meeting, the RBNZ kept its policy rate unchanged at 2.25% and signalled that further rates cuts were likely, saying “further policy easing may be required to ensure that future average inflation settles near the middle of the target range.”

Although we think the decision will be a close call (and the consensus agrees with 7 out of 15 economists expecting rates on hold), we believe that, ultimately, concerns about renewed strength in the housing market and decent domestic data will matter more than the weakness in inflation and inflation expectations, and the strength of NZD and that the RBNZ will leave its policy rate unchanged.

There is currently little priced in for next week’s meeting, about 8bp is currently priced in. This means that, if the RBNZ keeps rates on hold but continues to signal openness on cutting later this year, the impact on the currency is likely to be small. However, if it decides to surprise and cut, NZD would likely depreciate meaningfully, given its recent strength and positioning.

Credit Agricole:  Today’s main focus will be the RBNZ monetary policy announcement. The rates market is pricing in about a 30% chance of a 25bp cut by the RBNZ. Most of NZ’s economic indicators, including commodity prices, have improved since the RBNZ cut rates in mid-March. Indeed, likely to the RBNZ’s angst the housing market strengthened, partly also due to strong migration. Even the El Nino condition that led to drought in NZ has abated. Inflation was in line with the RBNZ’s March MPS forecast and GDP a little above its forecasts.

We see only two reasons for a cut today, and we do not think that they are strong enough. The weak opening price forecast by Fonterra announced in May, which will weaken dairy farmer incomes. But, farmers are being helped by interest-free loans from Fonterra. And second, to weaken the currency, which in TWI terms is about 3% above the RBNZ’s March forecast. But, the RBA signaling a pause in its rate cutting cycle yesterday has taken downward pressure off the AUDNZD (the biggest weight in the TWI) and so pressure off the RBNZ to cut to weaken the currency, even in the face of a weaker USD.

SocGen: The divergence between oil and non-oil commodity prices continues, with oil edging higher but some metals looking sickly. NZD is going to focus on the RBNZ meeting tonight with the market pricing in a 30% chance of a cut, odds that have tumbled from a peak above 80% a month ago.

We like longs in AUD/NZD at the bottom of the current range but today, the risk-reward that’s best is simply to sell NZD/USD.

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New Zealand dollar jumps to one-year high after RBNZ holds rates

NZD/USD climbs a almost cent

In the immediate aftermath of the RBNZ decision, the New Zealand dollar shot to 0.7115 from 0.7120, nearly a full cent.

The market and economists largely expected no change but a significant minority of economists and traders were positioned for a cut.

So far, there has been no follow through and NZD/USD has pared back the gains to 0.7070.

NZD/USD forecast for the week of June 13, 2016

The New Zealand dollar rose above the 0.7050 level during the course of the week but found enough resistance above there to keep the market somewhat in check. At this point in time, it’s not until we break above the top of the range for the week that we are willing to buy, but would be considering the possibility of a pullback as value. We would have to see in a supportive candle in that scenario though. Keep in mind, the New Zealand dollar tends to follow the overall health and attitude of commodity markets.

NZ Preview: Tourism, Construction Keep Economy in Reasonable Health

New Zealand's economic expansion likely slowed last quarter as weak global milk prices continued to curb export income. However, there remains plenty of impetus for growth going into the second half of the year, with tourists still flocking to New Zealand in record numbers and the nation's housing shortage buoying construction activity.

Analysts are picking a 0.5% rise in GDP growth for the first quarter, a few notches below the surprisingly strong 0.9% December quarter expansion, and a smidgen below the Reserve Bank of New Zealand's (RBNZ) 0.6% forecast.

On an annualized basis, growth is forecast to accelerate from 2.3% to 2.6%, while annual average GDP growth is forecast to slow from 2.5% to 2.4%.

"Business confidence is subdued, which is holding back investment appetites and weak dairy incomes are weighing on domestic spending," ASB chief economist Nick Tuffley said in a note. "But on the upside, tourism and other exports are doing well and construction activity is surging ahead."

Building work surged 5.3% in volume terms in the March quarter, taking building work put in place to a record high on a quarterly basis. Auckland's housing shortage and New Zealand's spreading property boom are likely to keep construction activity strong for some time.

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NZ Q1 GDP +0.7% q/q (expected +0.5%, prior +0.9%)

New Zealand

• expected +0.5%, prior +0.9%
  

•  expected +2.6%, prior 2.3%

• The latest growth was driven by the construction and health industries, but partly offset by decreases in the primary industries and manufacturing.  
• Construction rose 4.9%, the strongest quarterly growth for the industry since March 2014
• Service industries +0.8 percent this quarter, health and retail trade industries led the overall increase
• "When the rising population is taken into account, our GDP per capita rose 0.1 percent on the previous quarter"
• Strong tourist arrivals also supported the growth in service industries, reflecting a 4.9 percent rise in tourist spending

AUD/NZD: Pair Slumps to 13-Month Low on Oil Drop, Upbeat NZ Data

The New Zealand dollar continued to make ground on its Australian namesake on Thursday, hitting a fresh 13-month high after New Zealand's GDP growth figures came in stronger than expected.

New Zealand's economy grew 0.7% in the March quarter, beating the consensus forecast of 0.5%, and accelerating annualized GDP growth from 2.3% in the December quarter to 2.8% last quarter.

The upbeat New Zealand growth figures dealt the AUD/NZD the biggest blow on Thursday, but the pair continued to march lower throughout most of the European and US session.

By Thursday afternoon in New York the AUD/NZD was trading 0.70% lower at $1.0453, easing from $1.0528 almost 24 hours earlier, but trading off an intraday low of $1.0417 - the weakest the pair has traded since May 2015.

Oil prices also weighed on the commodity-sensitive Australian dollar, with Brent crude futures sliding 3.6% to $47.23 per barrel and West Texas Intermediate futures trading 3.8% lower at $48.19 per barrel.

NZD/USD forecast for the week of June 20, 2016

The NZD/USD pair initially fell during the course of the week but found enough support below the 0.70 level to turn things back around and form a hammer. The hammer of course is a bullish sign, but we need to clear the top of the previous week in order to go long. I have no interest in shorting this market though, because there is so much in the way of support and impulsivity over the last couple of weeks which of course signifies that the market is leaning in one direction.