The NZDUSD has been under pressure for a while, with the major event that could potentially reverse that being the upcoming meeting for the RBNZ. The Kiwi central bank meets hard on the heels of its Australian counterpart, which held rates steady.
Economists are looking for another “hawkish hold” in line with global central banks coming to the end of the hiking cycle. Though some of the particulars of the New Zealand situation might mean that the markets keep pressure on the Kiwi. The island nation’s isolation, which otherwise has allowed for support for the currency, makes it vulnerable to a couple of other economic headwinds at the moment.
What the forecasts are
There is a pretty solid consensus among economists that there won’t be a change in the OCR. Which means the onus of the market reaction will be on the forecast for what comes after. There is a nearly even split among economists forecasting a hike at the November meeting. In order for the “hawkish hold” to manifest, then the expectation is that the RBNZ would communicate in some way that there are strong odds for a rate hike in November.
A hold without talking up the possibility of more tightening in the immediate future – in other words, largely reiterating the statement from the last meeting – could set the Kiwi to weaken. The economic differences between the US and New Zealand would come more into play. Yields on the dollar have been rising thanks to a reevaluated outlook for the American economy. But Kiwi yields have been struggling as investors worry about growth in the island nation’s largest trade partner: China.
Costs and capital flows
The other issue weighing particularly on the Kiwi is the potential increase in fuel prices, that might mean the island nation will have to spend more on energy. Oil has already risen in price, but the persistence of supply restrictions among major exporters combined with a growing hope that there won’t be a global recession, has raised speculation that crude prices will keep rising.
If there isn’t a commensurate increase in exports from New Zealand – say, because of weakness in the Chinese domestic economy – then the balance of capital flows could mean that more Kiwi dollars will be sold in the future.
Keeping an even keel
The other issue that leaves economists inclined to expect the RBNZ to try to avoid any surprises at this meeting is that it’s the last before the General Election. The central bank does try to avoid making moves that could be seen impacting people ahead of the polls. For the moment, polling suggests that there will be a new government, but it’s not sure the opposition will manage to get enough votes to not have to form a coalition.
All of that could leave the RBNZ more cautious about providing any guidance for the next meeting, and disappoint markets expecting a more definitive answer about a hike. Recent data has been much better than expected, giving room for a bit of a breather. On the other hand, the recent strength in the economy does provide justification for the RBNZ if it does want to deliver a stronger message on bringing inflation down.
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