The NZDUSD has declined over the last several sessions as the greenback strengthened faster than the Kiwi dollar. This brought the pair off two-month highs, but over the longer term, it has been fairly range-bound. Part of the issue for kiwi traders is the lack of a major catalyst to push the pair beyond its range.
Traditionally, central bank action has the strength to push a currency. But the RBNZ is facing a similar trend as other central banks, so the relative difference in policy is less. In terms of the NZDUSD specifically, both central banks are seen on a hawkish trend. The difference is in the rate. Here, the uncertainty is more on the greenback’s side than on the kiwi side, which means the currency pair could react more to the Fed (and US data) than the RBNZ rate decision.
Certainty Leads to Complacency
Markets and economists are unanimous in expecting the RBNZ to increase its policy rate (the OCR) by 25 bps at the conclusion of its meeting on Wednesday. This high level of certainty means that the market is unlikely to react to the rate decision itself – unless, for some shocking reason, the RBNZ holds.
The market is likely to react to the outlook, given the fairly strong consensus that the RBNZ will hike one more time by the end of the year. This is where the uncertainty lies, depending on what the statement says and what clues Governor Anna Breman drops at the post-rate-decision press conference.
A Hike is Not a Foregone Conclusion
There are three more rate decisions (including this week’s), with the market pricing in a total of two rate hikes. The question is whether the RBNZ will go ahead and suggest a rate hike at the October meeting, which would be more hawkish than the market expects. If the consensus remains for a December hike, the NZD could be slightly weaker after the decision.
At the last meeting, the RBNZ hiked rates by 25 bps, as the New Zealand economy began to show signs of recovery and inflation remained elevated. Breman, with her experience at the Swedish Central Bank dealing with the fallout from the Russian invasion of Ukraine, has been more adamant about addressing energy costs than other central bank governors. This is the theme that hawkish traders are relying on, expecting interest rates to keep rising into the new year despite the economic conditions.
Measuring the Market Reaction
Not all economists agree with this view. Even among economists who expect the RBNZ to hike, some suggest it might not be prudent and that the economic recovery may need more attention. One way the central bank can address this difference is to deliver two back-to-back hikes (last July and this one in September) and then pause to assess the effect. Even if the RBNZ strongly implies further rate hikes, the notion of a “pause” to assess could be enough to let the doves take over.
The key will likely lie in the updated projections. If the RBNZ updates its OCR track to a terminal rate of 3.25% (implying two more hikes), then the market will likely see it as hawkish. But if it signals a lower target rate, regardless of timing, then the market could see that as dovish.
