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Market Insights

RBNZ surprise hawkishness sends NZD higher

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The New Zealand Dollar rallied again on Wednesday, breaking out of the recent consolidation. The move comes on the back of a 75bps rate hike from the New Zealand central bank and hawkish commentary. Has the kiwi got wings?

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A clear bullish reaction from the kiwi dollar, but the 200 day moving average sits just above, and could act as resistance.

What did the RBNZ announce?

The Monetary Policy Committee increased the Official Cash Rate (OCR) from 3.5% to 4.25%. The decision was widely anticipated, although some economists had expected a smaller 50bps rate rise. The meeting minutes revealed that the committee had even considered a 100bps hike!

The accompanying hawkish commentary took things up a notch as the central bank increased their estimate of the peak rate to 5.5%, compared with the previous forecast of 4.1% issued in August. On top of that, they don’t forecast any rate cuts until the second half of 2024.

Inflation remains well above target at 7.2%, and the rate setters noted that ‘measures of persistent or ‘core’ inflation have increased, as have expectations of future inflation. These measures suggest that inflation will remain elevated in the near term’.

RBNZ Governor Adrian Orr made clear that recession fears won’t distract the RBNZ. In fact, a recession may be a necessary evil to bring inflation down:

"Inflation is no one's friend and in order to rid the country of inflation we need to reduce spending levels. That means that we will have a period of negative GDP growth"

The committee expects this recession to start next year. GDP growth is forecast to contract by 1% in Q2 & Q3 of 2023, and ‘in the central projection, this recession is assumed to be spread over several quarters, although there is uncertainty about the timing’

It seems odd to hear a central bank explicitly state that they are looking to cause a recession. The idea is to bring supply and demand more into balance. You can almost feel the frustration that their aggressive hiking efforts haven’t really had much impact yet:

In New Zealand, household spending remains resilient, especially considering the rise in debt servicing costs, the fall in house prices, and low levels of consumer confidence.

Employment levels are high, and income growth and household savings are supporting spending. The rebound in tourism is also supporting domestic demand.

That’s how the RBNZ is looking at the demand side. On the supply side, it’s a familiar story:

The productive capacity of the economy is being constrained by broad-based labour shortages, and wage pressures are evident. Aggregate demand continues to outstrip New Zealand’s capacity to supply goods and services, with a range of indicators continuing to signify broad-based inflation pressure.

House prices are also forecast to drop by ~20% from peak to trough as “they are still above estimates of sustainable house prices and above levels that prevailed pre-COVID-19”.

Overall, the hawkish commentary is a double-edged sword for the New Zealand Dollar. ANZ researchers lay out the bull and bear case:

We think this decision will ultimately be NZD supportive on the grounds that the RBNZ’s track points to the OCR coming to rest above where markets expect the US Fed Funds rate to peak (markets are pricing in a 5.08% peak).

Getting on top of inflation should also be positive for the NZD in that it should reduce the need for markets to price in an inflation discount to the real exchange rate. However, this decision will stoke recession fears, and that may weigh on the Kiwi.

Although the NZD vs US dollar might not be the best pair to watch. The Federal Reserve seems resolute in their hiking mission too. Pairs featuring currencies of more hawkish central banks against some of the more reluctant hikers could see larger moves.

Not investment advice. Past performance does not guarantee or predict future performance.

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