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The Week Ahead in FX Markets – New Era for RBNZ as Markets Await US Non-farm Payrolls

Published April 1, 2019

By Phil Lynch

It was a tough old week for the New Zealand dollar following the RBNZ’s OCR Decision, which indicated the next move is more likely to be down. It was a notable shift to a dovish stance. The key change in language was dropping the ‘next move could be up or down’ and replacing it with ‘the next move is more likely to be down’.

On a trade-weighted basis, the New Zealand dollar is off 1.4% since Wednesday’s announcement.

Despite the significant change in tone, the dust settled fairly quickly, and the New Zealand dollar went on to steady throughout the latter half of the week. This morning the kiwi finds itself bouncing back from last week’s lows and opens 0.5% higher against the greenback at 0.6825 – indicating just how reliant the NZD is on offshore events.

The move higher came amidst growing trade talk optimism and calls from the White House for the Fed to immediately cut interest rates by 50 basis points. Of course, the US Federal Reserve is independent of the White House. The Fed is expected to focus on economic data before making any such decisions.

A New Era for the RBNZ and Monetary Policy

This morning ushers in a new era for the New Zealand dollar, as the new RBNZ Monetary Policy Framework takes effect. The key change is the introduction of the Monetary Policy Committee (MPC), it’s operational objectives, and their code of conduct. Ultimately – this will be the new group responsible for setting the OCR, with the objectives to:

  • keep future inflation between 1 and 3 percent over the medium term, with a focus on the 2 percent mid-point
  • support maximum sustainable employment

There are seven members of the MPC, including three non-RBNZ members. The members are:

  • Adrian Orr – Governor of the RBNZ
  • Geoff Bascand – Deputy Governor of the RBNZ
  • Christian Hawkesby – Assistant Governor of the RBNZ
  • Yuong Ha – Manager at RBNZ
  • Professor Caroline Saunders – Professor at Lincoln University
  • Professor Bob Buckle – Professor at Victoria University
  • Peter Harris – Economist

I am not alone in my anticipation of the MPC’s first OCR and MPS due on 8 May, and I will be interested in their view on inflation in New Zealand. I will be looking forward to their interpretation of the objective of ‘keeping future inflation near the 2 percent midpoint’.

Since March 2009 (the heart of the GFC), the New Zealand economy has only seen five quarters where the year on year inflation reading has come in above 2 percent, and four of those were down to the 2010 hike in GST. So that makes 1 in 38 quarters where inflation has been above the 2% mid-point target – which does seem a little unbalanced to me.

The New Zealand dollar with a Dovish RBNZ

Last week the RBNZ officially made the switch from neutral to dovish, and this marks an important change for the kiwi which has been lacking direction. The immediate change was very noticeable in markets, and trading banks have been forced to revise their own forecasts lower.

There have not been significant changes to New Zealand’s economic activity (at least vs the RBNZ’s own forecasts), and not enough to warrant such a change in stance. So most analysts have put the shift to dovishness down to weaker global economic conditions – for which there has been plenty of fodder to consider, most notably weaker US, European and Chinese economies, along with lingering concerns about Brexit.

For now – markets have priced in a 36% chance of a rate cut on 8 May. I find it unlikely that the new MPC will launch into such a dramatic change, and I do not believe the recent dovishness will be a ‘direction-setter’ for the kiwi. Instead, the kiwi is likely to take cues from offshore.

The Week Ahead

This week is stacked with US economic data releases, culminating in Saturday morning’s Labour Market report. Market’s are expecting more good numbers – including the addition of 170k new jobs, the Unemployment Rate staying at 3.8%, and year on year Average Earnings rising by 3.8%.

The other key event to watch will be Tuesday afternoon’s RBA Cash Rate decision. The RBA is widely expected to keep their rates on hold at 1.50% – but there is some concern they might follow the RBNZ’s approach and shift to a clearly dovish stance.

Local data this week includes the GDT Dairy Auction, which has had a strong run with eight consecutive rises in price. High commodity prices continue to support the kiwi dollar – and this will help keep the RBNZ doves at bay.

Chart of the Week: New Zealand Inflation Since 2009

As mentioned earlier, New Zealand inflation has spent almost the entire decade lagging behind the 2% target mid-point – reinforcing the need for the RBNZ’s dovish stance. Click on the chart to enlarge.

Lastly – a Happy Financial New Year to you all. If there is anything we can do to assist, please don’t hesitate to ask.