RBNZ & Bank of Canada hike by 0.5%
Hike the rates! Both the Reserve Bank of New Zealand (RBNZ) and the Bank of Canada (BoC) decided to hike by 0.5% (50bps) at their meetings on Wednesday.
Two central banks. Two identical rate hikes, yet the FX reactions were completely opposite.
First up, NZDUSD on the daily chart
Massive bearish engulfing candle after tagging the 20 & 200 day moving averages. Many would understand this as a reversal pattern, but there’s not been much of a move to reverse! The kiwi has already been trending down and closed lower on 6 of the past 7 trading days.
Which makes the reaction a tricky prospect to explain. You could say that the decision wasn’t entirely unexpected. Money markets were pricing in a 75 to 80% chance of a 50bps rate hike. The other “go-to” explanation for these kinds of moves (buy the rumour, sell the fact) doesn’t really fly either. The market “sold the fact” a week before it was fact…
Perhaps it can be explained as disappointment that the RBNZ are doing more now rather than more overall. The RBNZ projection for the Overnight Cash Rate (OCR) shows that the central bank still sees rates peaking at 3.4% by the end of 2024, exactly as they did at the February meeting. Financial markets had started to price that peak closer to 4%.
A faster series of rate hikes by one of the first central banks to start monetary tightening could mean that they simply get to the end of the hiking cycle sooner.
The Bank of Canada and USDCAD
The Bank of Canada delivered a hawkish hike and the Canadian Dollar strengthened. The central bank offered an upbeat assessment for economic growth. They see GDP of 4.25% in 2022, dropping to a still strong 3.25% in 2023, and then down to 2.25% in 2024.
The BoC also forecast that excess demand, a tight labour market, and rising wage growth will all be positive drivers for the Canadian economy. Given this backdrop, and unlike the RBNZ, they increased their estimate of the neutral policy rate (from 1.75-2.75% to 2-3%).
In the press conference Governor Macklem seemed to suggest that the BoC will be moving rapidly towards neutral policy levels before pausing to reassess.
Inflation is expected to remain high and the bank will act forcefully to counteract this. From the statement:
"CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024."
The BoC also confirmed that Quantitative Tightening will start from April 25th. As assets on their balance sheet mature they will not be replaced (balance sheet run-off). No active selling of assets was announced.
What could explain the different reactions?
One possible explanation to consider is that countries who have let inflation run hotter for longer before responding may need to tighten more relative to earlier hikers such as the RBNZ to bring prices under control.
Or perhaps it was merely a kneejerk response and not anything to read too much into. Markets can be fickle around these events until the dust settles.
Interestingly, the Canadian dollar has continued to strengthen early the next day, while the New Zealand Dollar has reversed some of the prior day’s losses.
Not investment advice. Past performance does not guarantee or predict future performance.
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