NZD In Focus
The New Zealand Dollar is back in focus today as the markets await the November RBNZ MPR meeting tonight. Ahead of the meeting, expectations are broadly in favour of the bank tightening once more. With data improving steadily, inflation soaring and a relatively stable COVID backdrop (compared with other parts of the world), the market judges that the field is open for an RBNZ rate hike today, in line with previous signalling from the bank. Given the hawkish expectations heading into the meeting, the focus therefore is on the extent to which the RBNZ lift rates and how hawkish the accompanying guidance is.
Hawkish Expectations For RBNZ
Following the RBNZ’s initial rate hike in October, making it the first of the G10 central banks to tighten, economic data has continued to paint a positive picture. The unemployment rate has continued to fall and with the country currently facing a labour shortage, exacerbated by restrictions on foreign arrivals, the labour market is likely to continue to tighten. Alongside this, inflation is has soared to around its highest levels in a decade. Additionally, inflation expectations have surged also. Last week’s Q4 inflation expectations came in around double the market forecast at just under 3%.
Two-Way Risks
Given the strength of recent data, current OIS pricing is showing the market is fully pricing in a .25% hike at the meeting tonight. We’re also currently seeing around a 40% chance that the RBNZ hikes by .5%, taking the headline rate back up to 1%. Alongside a decision on rates today, we will also receive the latest set of economic forecasts and OCR projections, giving traders an additional area of focus within the meeting.
Market Scenarios
In terms of gauging the market response, then the focus will be not just on the move in rates but also in how the projections and forecasts are update. If the RBNZ hikes by just .25% but we see a firmly hawkish shift in forecasts and projections, suggesting a quicker pace of tightening than previously, this should see NZD well bid. If we see a .50% hike with hawkish forecasts and projections, this would clearly be the most bullish scenario for NZD. If the RBNZ hikes by .50% with relatively unchanged forecasts, this might prove to be short term bullish for NZD. Finally, if the RBNZ hikes by just .25% without much change in forecasts, this would likely be met with disappointment by NZD traders, sending the currency lower.
Technical Views
NZDUSD
The reversal in NZDUSD from the October highs around .72223 has seen the market trading back under the .7110 level and back inside the bear channel from YTD highs. Price is currently testing the .6933 level support. This is a big support zone and a break lower here will be a strong, bearish development, opening the way for a test of the .6791 level next.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.