The Reserve Bank of Australia announced a monetary policy decision this morning and no surprise was offered - rates were held unchanged and lack of hawkish message in the statement triggered a drop on AUD market. Second major Antipodean central bank - Reserve Bank of New Zealand - will announce its decision tomorrow at 2:00 am BST. Let's take a quick look at what markets expect and what the situation on NZDUSD looks like.
Hawkish hold?
Recent data from the New Zealand economy has been generally better-than-expected. Also, inflation remains above the RBNZ target. However, there are also some downside risk to the growth outlook, like for example weakness in the housing market resulting from quick rate hikes as well as uncertainty around the Chinese economy, which is an important factor for other economies from the region.
However, there are non-economic factors that support the view that rates will not be hiked at tomorrow's meeting. Firstly, it will be a meeting that is not accompanied by the release of a new set of economic forecasts and there will be no post-meeting press conference of RBNZ Governor Orr. Secondly, the decision will be made just 10 days before general elections in New Zealand. It looks highly likely that RBNZ will prefer to wait with policy adjustments until after the elections. Nevertheless, a hint that a hike may come later this year given the current economic situation may be made. Having said that, a so-called hawkish hold looks probable.
What does the market expect?
Just as it was the case with the RBA decision today, neither money markets nor economists surveyed by Bloomberg expect the RBNZ to change the level of interest rates.
Out of 22 economists polled by Bloomberg not a single one expects a decision other than hold. When it comes to market pricing, overnight swaps price in just a 7% chance of a rate hike tomorrow. However, markets see an over-60% chance of RBNZ hiking rates at the November 2023 meeting and fully price in a 25 basis point rate hike by the February 2024 meeting.
Money markets do not price in a hike tomorrow but see an over-60% chance of a hike at the November meeting. Source: Bloomberg Finance LP
A look at NZDUSD
Taking a look at NZDUSD chart at D1 interval, we can see that the pair has recently attempted to break above the resistance zone marked with 50% retracement of the upward move launched in October 2022 but failed. A strong pullback this week pushed the pair downward to the support zone marked with 61.8% retracement that acts as the lower limit of recent trading range.
Given that the market is expecting a hawkish hold, RBNZ may struggle to deliver onto those expectations unless it gives a clear hint that a rate hike at the November meeting is being considered. Of course, a surprise rate hike tomorrow would be positive for the New Zealand dollar and would likely trigger a spike on NZDUSD. Nevertheless, lack of a surprise hike or a strong hint at such a move at the next meeting would make it hard for NZD bulls to make the case and therefore we see risks for NZD to be skewed to the downside ahead of tomorrow's decision.
A break below the lower limit of the trading range in the 0.5900 area could be followed by a deeper decline with textbook range of the downside breakout suggesting a possibility of the pair dropping to the 78.6% retracement in the 0.5725 area.
Source: xStation5
