Who’s ready for the next central bank decision?
Well, if you ain’t ready then you better get on it ’cause the Reserve Bank of New Zealand is coming up soon, so you better prepare if you plan on trading NZD!
Events in Focus:
Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement
When Will it Be Released:
October 4, Wednesday: 1:00 am GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
RBNZ is likely to keep the official cash rate (OCR) unchanged at 5.50%
The RBNZ will likely note slowing economic conditions, but will also likely reiterate that inflation conditions are still too high
Will likely signal a data dependent stance on potential future monetary policy adjustments
Relevant New Zealand Data Since the Last RBNZ Statement:
🟢 Arguments for Tighter Monetary Policy / Potentially Bullish for NZD
ANZ: New Zealand’s business confidence index turned positive, up from -3.7 to 1.5 in September; Jury remains out on whether prices are falling “fast enough to bring core inflation pressures down in a timely fashion”
ANZ-Roy Morgan Consumer Confidence for September: 86.4 (81.5 forecast; 85.0)
New Zealand’s GDP grew by 0.9% in Q2, more than twice the 0.4% uptick expected and better than the -0.1% reading in Q1
New Zealand’s food price index rose by 8.9% y/y in August (vs. 9.6% y/y in July) led by grocery food prices
ANZ: New Zealand business confidence lifted another 9 points to -3.7, the highest reading since mid-2021 as inflation indicators continued to ease
Dairy auction prices in New Zealand rose for the second successive auction. Both overall prices and key whole milk powder (WMP) prices jumped by 4.6% (vs. 2.7% previous)
New Zealand’s current account deficit shrank from 4.66B NZD to 4.21B NZD in Q2, marking its second consecutive quarterly decrease
New Zealand Terms of Trade for quarter ending in June 2023: 0.4% q/q (-1.4% q/q forecast; -1.5% q/q previous)
🔴 Arguments for Looser Monetary Policy / Potentially Bearish for NZD
Westpac: New Zealand household confidence fell 2 points from 83.1 to 80.2 in September as living and mortgage costs continue to rise
BusinessNZ: New Zealand’s service sector weakened from 48.0 to 47.1 in August; “Negative comments received were strongly dominated by uncertainty regarding the upcoming General Election, as well as continued adverse economic conditions”
New Zealand’s trade deficit widened from 1.2B NZD to 2.3B NZD in August as weaker Chinese demand weighed on exports
New Zealand commodity prices fell by 2.9% m/m in August due to lower dairy and lamb prices, following earlier 2.6% slump
New Zealand’s building permits dropped by -6.7% m/m in August vs. -5.4% decline in July
New Zealand Manufacturing Index in August: 46.1 vs. 46.6
Previous Releases and Risk Environment Influence on NZD
August 15, 2023
Action/results:
In August, the Reserve Bank of New Zealand held the official cash rate at 5.50% as expected, but unfortunately for Kiwi bears, the RBNZ gave off hawkish vibes as the toned down the possibility of rate cuts, emphasizing no rush to change rates anytime soon.
This quickly prompted a bullish reaction in the Kiwi, a welcome sight for the bulls as it was under pressure early on due to broad risk aversion behavior sparked by China growth and stability headlines.
Risk Environment and Intermarket Behaviors:
As mentioned above, China dominated risk sentiment early on with news of Country Garden – China’s top private property developer – missing bond payments AND suspended the trading of 11 of its onshore bonds, as well as news of stimulative actions by the People’s Bank of China to support their markets.
This sparked pro-Dollar and some risk-off vibes, but risk sentiment didn’t really have a uniform behavior pattern due to a calendar heavy with top tier catalysts from all over the globe.
July 12, 2023
Action/results:
As expected, the RBNZ kept its interest rates steady at 5.50% in July. The non-rate hike initially weighed on NZD but the central bank also said that it would keep its OCR at “a restrictive level for the foreseeable future,” at least until CPI “returns to the 1 to 3% annual target range.”
NZD, which was inching higher ahead of the event, hit new Asian session highs before profit-taking ahead of the U.S. CPI report dragged the comdoll and other risky assets lower.
Kiwi still capped the day in the green, though, because the U.S. CPI numbers later that day printed lower and encouraged risk-taking during the U.S. session.
Risk Environment and Intermarket Behaviors:
There was limited volatility at the start of the week as the markets braced for the U.S. CPI report and its impact on U.S. dollar demand.
The CPI and PPI reports fell short of estimates, adding to the cooling inflation narrative and lower odds of interest rates rising much further.
Risk assets overpowered the dollar and caught some points up until Friday when we saw some profit-taking.
Price action probabilities
Risk sentiment probabilities: Based on the forex calendar, we’ve likely got a busy week ahead, and the top tier events that are likely to rattle broad risk sentiment around the RBNZ release is the U.S. job openings data ahead of the event on Tuesday, and possibly the Euro area services PMI updates during the Wednesday London session.
The U.S. JOLTS job openings data is the earliest signal of what we may see from Friday’s highly anticipated U.S. Non-Farm Payrolls update, so a surprise there would likely spark a noticeable spike in volatility.
Expectations are pointing to slightly less job openings in September than August, potentially reducing odds of the “soft landing” narrative as the image of a tight labor market begins to fade.
European services PMI are likely to continue to signal contractionary conditions (likely supporting risk-off vibes), but given that this is the final read for September, the reactions may be limited, barring a major surprise in the data.
New Zealand Dollar scenarios
Potential Base case:
Alternative Scenario 1: Recent data seems to support the idea of the RBNZ holding off on any moves, given that we are seeing signs of a hot economy being less hot, and inflation rates slowing but the absolute rate of inflation and prices are still relatively high.
So, the event can go either way between a “dovish hold,” a “neutral hold” and a “hawkish hold,” but we’re leaning somewhere between neutral-hawkish hold
given the recent stickiness in inflation across the globe and in New Zealand, as well as solid New Zealand economic data.
This expectation is likely why the Kiwi has been a monster run this past month, and if the RBNZ does match or actually tone down the “hawkishness,” then a “buy-the-rumor, sell-the-news” reaction may be in the cards.
Or in other words, we may see an initial sell-off in the Kiwi if the event comes as expected, but that may be a short lived move as a pullback against some of the currencies with less hawkish central banks may draw in Kiwi buyers.
The “buy-the-rumor, sell-the-news” reaction scenario is less of a risk though if risk sentiment continues to lean net negative and pushes the Kiwi lower ahead of the event.
Long Kiwi setups against safe havens makes sense after this sequence of events, especially if broad risk sentiment shifts positive this week.
Alternative Scenario 2: Given that recent data from New Zealand has been arguably net positive and inflation remains sticky (especially with oil prices rising sharply in September), there is a chance of another very “hawkish” hold statement as we saw at the last meeting.
Again, there is still a risk of a “buy-the-rumor, sell-the-news” reaction, but the odds rise further in this scenario of the Kiwi drawing buyers against the low yielders, in a risk-on environment.
Or if oil continues its current pullback from its own crazy rally, NZD/CAD is also a pair to watch for a possibly long play that may potentially work in both a risk-on or risk-off environment.
Which ever way you decide to lean on NZD or how you manage risk around the event, it is important to note once again that trader focus is likely to jump quickly, as it tends to do in the first week of the month and with a busy calendar.
This can be seen in the last two releases as the initial reaction in the Kiwi to the event were reversed by the London or U.S. trading session of the same day as traders switched their attention back to U.S. economic updates.
That means stay nimble with this event, pay attention to the headlines/reactions, and manage risk accordingly!
