New Zealand Dollar: Hawkish RBNZ risks and range trading – Rabobank

Rabobank’s FX Strategy team discusses the New Zealand Dollar (NZD) ahead of the July 8 Reserve Bank of New Zealand (RBNZ) meeting, where consensus and the bank expect a 25 bp hike to 2.5%. They note mixed views from the NZ (New Zealand) shadow board, moderating inflation as Oil falls, and a fragile domestic recovery. With nearly four hikes priced, Rabobank sees limited NZD upside and expects choppy NZD/USD ranges.

RBNZ path, inflation and NZD pricing

"In line with Rabobank’s view, the consensus of the Bloomberg survey points to a 25 bp rate hike, which would take the main policy rate to 2.5%. Forecasters, however, are not unanimous."

"This news has clearly fanned some doubts in the market about the resolve to the RBNZ to tighten policy and has consequently weighed on the NZD. Today the NZD is positioned second to last on the G10 one day performance table, just above the JPY."

"In view of the inflationary impact of this year’s closure of the Strait of Hormuz, RBNZ Governor Breman stated after the last RBNZ policy meeting in May that the central bank expects to “increase interest rates this year, to help keep a lid on inflation”. That said, oil prices have come down substantially in the wake of the June 17 signing of the MoU by the US and Iran to levels last seen just before the start of the war."

"Currently, market implied interest rates suggest scope for almost four 25 bps rate hikes from the RBNZ over the next year to around 3.18%, from 2.25% currently. This is not so dissimilar to the forecasts from the NZ shadow Board, whose views are centred around rates reaching 3-3.25% over the next year."

"With so much tightening already in the price, we don’t see much scope for the NZD to improve its position on the G10 performance table this year. Indeed, any sign that the RBNZ is backing down on its hawkish tone, could leave the NZD vulnerable."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)