The second half of the week has a couple of potential surprises.
While it’s true that all central banks are charting new territory, that’s especially the case for the RBNZ and Banxico… But for widely different reasons.
Given the situation, the market might have a rather unusual reaction to the usual. Therefore, it’s worth paying attention to the unexpected signals.
New Zealand to Stay Cautious
Traditionally, the economies of New Zealand and Australia have been attached at the hip. So too have their monetary policies.
However, the recent spike and drop in cases in Melbourne have set the two countries apart as they deal with the effects of COVID.
New Zealand has managed to keep the number of cases down. However, virtual isolation has decimated its important tourism industry. The country then slipped into recession for the first time in nearly two decades.
For analysts, the usual comparison to the larger neighbor across the Tasman Sea isn’t as relevant.
The RBNZ, likewise, is charting its own course for now, as New Zealand’s recovery prospects rely more on the political response of the government than the number of cases.
With global cases still on the rise, travel restrictions are likely nowhere near to being lifted.
What Now? The Market Reaction
The response to the situation from the RBNZ appears to be ‘wait and see,’ with a unanimous agreement among economists that the central bank won’t change anything following their meeting.
Governor Orr has promised to keep policy the same until March of next year (barring unforeseen circumstances, naturally) and the market largely believes him.
Attention has returned to the housing market, which might add a wrinkle to the policy outlook. House prices are projected to increase a further 6% in the remainder of the year, despite the recession.
The prospect of a housing bubble (and subsequent burst) in the middle of a pandemic might prompt some action from the RBNZ. However, that will be entirely unorthodox and likely would take the market by surprise.
Analysts are going to be scrutinizing commentary to see if there is any mention of housing.
So Banxico is Finally Getting Good News?
Elsewhere, as more investors feel that we are firmly on the rebound, risk appetite has returned. This has given strength to the Mexican peso.
The Banxico has been desperately holding the line to keep the currency from depreciating too much, which would have serious inflation prospects.
From the minutes of the last meeting, it appears they are comfortable to continue cutting rates as the USDMXN continues to drop.
However, when the rate cuts will happen is where there isn’t much consensus.
Economists broadly agree that rates will be at 4.0% by the end of the year. This means two rate cuts over the course of the next three meetings.
There is a slim majority expecting a rate cut at this meeting; which means we could have more volatility in the market since it’s likely not to be priced in.
