Could RBNZ support kiwi’s recent strength? – Preview

May 20, 2024 soat 7:20 GMT- Achilleas Georgolopoulos

• RBNZ meets on Wednesday, no rate change expected

• Quarterly forecasts and press statement will be closely scrutinized

• Press conference to gain interest if RBNZ turns dovish

• Kiwi’s recent run against the dollar could be under threat

Third RBNZ meeting in 2024

The Reserve Bank of New Zealand will announce its interest rate decision on Wednesday at 02:00 GMT with the press conference following one hour later. The market is overwhelmingly expecting no change in the cash rate as it is currently assigning just a 2% probability of a 25bps rate cut.

Similarly to the RBA, the RBNZ remains one of the most hawkish central banks at the current juncture. In the last two meetings, Governor Orr et al repeated the need for maintaining the official cash rate (OCR) at a restrictive level for a sustained period of time to ensure the return of inflation to the 1-3% target range.

Softer data recently...

However, since the April 10 meeting, data has been on the weak side. Business sentiment has been dropping, consumer confidence has taken a turn for the worse, and the unemployment rate reached a 3-year high at 4.3% in the first quarter (Q1) of 2024.

... but inflation remains elevated 

Amidst this soft patch, the inflationary pressures are not abating as much as the RBNZ might have hoped for. The Q1 CPI print came below expectations, but remained north of 4%, while both the quarterly labour costs and producer prices indices confirmed the ongoing stickiness in inflation. But the RBNZ might be finally seeing the light at the end of the tunnel as the quarterly survey of forecasters and business leaders has the 2-year inflation rate dropping to 2.33%, not far from the RBNZ’s inflation target midpoint.

Quarterly projections matter 

The RBNZ’s overall stance at this meeting might also depend on its quarterly projections. The previous Monetary Policy Statement in February had annual inflation dropping to 2% in the fourth quarter of 2025, and causing a 60bps decrease in the official cash rate, with the first rate cut penciled in for the second quarter of 2025.

A significant revision in the 2025-2026 inflation figures and the watering down of the key statement phrase referring to “the need to keep the OCR at restrictive levels” is necessary in order to add credibility to the market’s expectations. The market is currently pricing in 40bps of easing in 2024 with the first rate cut set for the October 9, 2024 meeting.

Putting everything together...

All-in-all, the RBNZ is expected to remain satisfied with the progression of the domestic economy and its current monetary policy stance. Considering the recent data flow, it looks somewhat difficult for Wednesday’s Monetary Policy Report to confirm the markets’ expectations for considerable easing during 2024, despite some possible downward revisions in the quarterly projections.

Could kiwi/dollar continue to climb?

With the market still digesting the recent mixed US data releases, which are potentially opening the door to a Fed rate cut during the summer, the kiwi has been strengthening against the US dollar.

Interestingly, in the last two RBNZ meetings the kiwi/dollar pair ended the session in the red. In February, there was a buildup of hawkish RBNZ expectations ahead of the meeting, which were not met, while in April the stronger US CPI print helped the dollar outperform its counterparts across the board.

Should the RBNZ decide to moderate its current stance, the kiwi could be on the back foot against the dollar with the pair possibly enjoying higher volatility and retesting the lower boundary of the 0.6060-0.6092 range. On the flip side, an uneventful meeting with the RBNZ maintaining its current balanced stance might cause a more muted market reaction. The next resistance appears to be at the 0.6198 level.