Forex Trading Library

What You Need to Know: NZ & Mexico Rate Decisions

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New Zealand to Hold Fast

With the COVID outbreak largely controlled domestically, New Zealand is basically holding the line while the rest of the world gets the virus under control.

This poses a problem, as an important part of the island nation’s economy comes from tourism and travel.

Although Governor Orr has repeatedly said he’s not averse to negative rates, there is no expectation that there will be a cut this time around. Analysts overwhelmingly see the RBNZ preferring non-traditional policy approaches.

The current consensus is that they will increase the LSAP easing program to NZD85B.

The Market Reaction

The NZDUSD has been range-bound over the last several sessions. However, this is largely because of things happening outside New Zealand.

The USD has weakened in response to improved risk sentiment, which has led investors on a hunt for yield. This might have given the NZD an opportunity to move higher, but it is no longer a carry trade play as the central bank has slashed rates.

The market appears to be pricing in no major changes in terms of rhetoric from the RBNZ.

So far, they have emphasized they stand prepared “for the use of additional monetary policy tools as needed”. Modifying that language would likely convey a less dovish stance. It would also finally help the NZDUSD push above its range.

Mexico to Continue the Downward Trend

On Thursday, Mexico’s central bank concludes its meeting.

The consensus is for a -50bps rate cut, as the bank struggles to prop up the economy and keep the peso from deflating. Banxico officials have continued to provide contradicting signals about forthcoming bank policy, giving the market increased uncertainty.

On the one hand, the Banxico was slow to cut rates as the pandemic hit. This reticence to cut rates from what was at the time the highest in the world led JP Morgan to declare Mexico’s regulator as the most inflationary-adverse central bank in the emerging markets.

How Much More?

The counterposition is that inflation has spiked recently. The last core CPI change came in at 4.1% annualized.

Although the consensus among analysts is that inflation is likely to resume a downward trend later in the year, it might be enough to cause the Banxico to hesitate.

The consensus is that from here to October, there will be a 50 basis point rate cut. If it happens on Thursday, a pause is expected in September.

On the other hand, if there is a surprise, and the bank throws the markets for a loop with a 25 basis point cut, it would virtually guarantee another 25 points being shaved off at the next meeting.

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