NZD: Rising RBNZ expectations - Nomura

Peter Dragicevich, Research Analyst at Nomura, expects the Reserve Bank of New Zealand (RBNZ) to sound more upbeat at this week’s policy meeting as the market consensus has also shifted this way, pointing to a higher hurdle for the RBNZ to meet or exceed expectations.

Key Quotes

“While we retain a positive medium-term NZD outlook, this makes us a bit more cautious on NZD over coming sessions. Given the risks, and the extent of recent moves, we have pared back our short AUD/NZD exposure and lowered the stop on the remainder.”

“The RBNZ policy meeting and Monetary Policy Statement (MPS; both on 11 May) are the next major NZD-centric event. We, and the broader market consensus, expect no interest rate change. The main interest and focus will be on the updated economic projections and any shift in policy bias.”

“New Zealand’s economic data has improved recently, with the unemployment rate dipping back to a cyclical low of 4.9%, Q1 inflation surprising to the upside and New Zealand commodity prices, particularly dairy, rebounding. Added to that, the softness in Q1 New Zealand GDP looks to have been transitory, broader global growth momentum has remained positive despite pockets of geopolitical risk, and the NZD trade-weighted index (TWI) has declined over recent months with the average so far over Q2 tracking close to 4%, below the RBNZ’s expectations.”

“Overall, we believe that given this mix, the RBNZ should sound relatively more upbeat than in its recent policy meetings, particularly as the factors outlined above point to a shift up in the inflation projection profile over 2017 and into 2018. So far in 2017, the RBNZ has stressed that it now has a neutral policy bias, with its central case flagging a potential start of the tightening cycle in late 2019. We continue to believe this is overly pessimistic, and look for the first interest rate hike in mid-2018. However, as we have noted, we do not anticipate the RBNZ making such a large leap regarding its interest outlook at the May 2017 meeting (i.e. bringing forward the timing of its first hike from H2 2019 to H1 2018).”