October will mark one year since the Reserve Bank of New Zealand (RBNZ) launched its tightening campaign. Despite continued rate hikes, the central bank will not abandon its mission against inflation as the impact has been negligible so far, with traders widely expecting another half-point rate hike percentage on Wednesday at 02:30 GMT.
RBNZ to raise rates by 50 basis points
A delayed lifting of travel restrictions, China’s zero covid policy and a darkening global economic outlook have overshadowed the impact of the RBNZ stimulus cut, pressing the risk-sensitive kiwifruit more than 10% over the course of of the past year.
What’s worse is that a plummeting national currency makes imports more expensive, adding more fuel to already high inflation. Although the RBNZ was the first of the major central banks to enter the tightening era, abruptly raising its key rate from 0.25% to 3.0%, inflation continued to accelerate dangerously as elsewhere in the world. world. The latest quarterly CPI report for the three months ending June showed consumer prices rising at the fastest pace in 32 years at 7.3% year-on-year and well above target. from 1 to 3% of the central bank.
The next inflation update will be on October 18, but given the evidence from abroad, there is little doubt that consumer prices have continued to grow at an unacceptably high rate, or at least have slowed to a snail’s pace in the third quarter. Therefore, as investors have largely priced in, the RBNZ is likely to stay on its hawkish trajectory this week, announcing its fifth straight 50 basis point rate hike. Such an action would put interest rates above the federal funds rate.
Foreign exchange intervention
The depreciation of the currency has been in the spotlight after Japan’s intervention in the foreign exchange market. However, a similar response in New Zealand is less likely. First, the RBNZ has a much lower share of foreign exchange reserves than its American, Asian and European counterparts. Second, other major currencies have also fallen aggressively, but the kiwi is still relatively cheaper against the greenback, euro and pound, keeping exports and tourism competitive in international markets.
Pricing advice in a nutshell
The monetary divergence with the Fed, and thus the spread between 10-year government bond yields in the United States and New Zealand, is narrow. Therefore, unless a sudden change in global risks, and in particular the slowdown in the Chinese economy, occurs, central bank policy guidance may be the only factor to set the tone for the kiwi/ short term dollar.
Futures markets currently forecast three more rate increases of 50 basis points by February 2023 and expect the central bank to move towards normal rate hikes of 25 basis points thereafter. Strikingly, RBNZ chief Adrian Orr admitted that while there is still work to be done, the “tightening cycle is very mature”, increasing speculation that the central bank may soon change course. .
On the other hand, a majority of economists, including the Westpac Banking Corporation, recently revised their rate forecast for 2023 up to 4.5-4.75% and more than the RBNZ’s projected terminal rate of 4 .10%, citing the economy’s resilience and secondary potential. inflationary pressures that may appear subsequently. Indeed, surprisingly strong second-quarter GDP growth numbers, a robust labor market and improving earnings forecasts and business activity suggest the economy can still afford higher debt-servicing costs. students.
However, sectors such as the housing market will need to be watched closely given the high household debt to income ratio if rates continue to soar. According to Westpac, home prices nationwide have fallen 9.0% since last November. and the flattening trajectory of retail spending already signals more softness ahead. Note that wage growth is still slow relative to inflation.
Therefore, with investors receiving mixed signals on the path to monetary tightening in 2023, the Kiwi could look vulnerable to any changes in RBNZ language. If the central bank sees the peak in terminal rates higher than expected and downplays the risk of a housing market cooling, the Kiwi/Dollar could extend its rally above resistance near 0.5724 and towards the moving average. 20-day single (SMA) at 0.5900. Higher, traders will look for a break above the 0.6000 mark.
Alternatively, if policymakers are worried about global economic conditions, judging that monetary tightening has contributed enough to stabilizing inflation over the next year, the pair will push for a close below the crucial 0 support, 5627. The 2020 low of 0.5468 could appear on the radar in the event of deeper declines.