New Zealand Dollar: Rate Hike Loathing

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The Reserve Bank of New Zealand could send ripples through financial markets if it raises interest rates next week, says Rabobank.

The New Zealand Dollar faces a pick-up in month-end volatility as global markets prepare for a potential shock interest rate hike at the Reserve Bank of New Zealand (RBNZ) on February 28.

"Despite the economy being in a technical recession, a week ago the local market was already making calls that the RBNZ might hike twice this year from the current level of 5.5%," says Michael Every, Global Strategist at Rabobank.

"A shock rate hike would send ripples right the way round the rest of Western bond markets," he adds.

Every writes a daily must-read strategy column for Rabobank's clients and explains that the RBNZ decision could have implications for other central banks, given its status as a first-mover. He reminds us that the RBNZ was the first central bank to adopt modern inflation targeting, while it was also the first major bank to raise interest rates in the current cycle.

Market bets for an RBNZ rate hike were boosted after domestic lender ANZ said the next move at the central bank could be a hike following stronger-than-expected quarterly employment numbers.

Rabobank's Australia and New Zealand strategist Ben Picton is meanwhile visiting New Zealand and reports back that "it isn't just a technical recession, but a real one.
Boarded-up shops are quite evident."

However, he also notes that there are abundant signs of some businesses doing very well: there are lots of expensive boats in Auckland harbour, plenty of cruise ships, and long lines of tourists at some high-end shops.

"In short, we might be talking about a K-shaped economy, which we all talked about a lot during Covid, and then immediately forgot after lockdowns ended. However, that winners-and-losers dynamic is evident globally in all kinds of ways," says Every.

Above: NZD is the best performer of the past month as rate cut bets receded and odds of a rate hike grew. Track NZD with your own custom rate alerts. Set Up Here

The strategist explains the RBA and RBNZ really, really don't want to hike, but they can no longer rule it out.

"On one hand, that threat might be necessary to cool the market’s heels – which is working. On the other hand, if aggregate demand remains above the economy’s supply capacity, despite the current level of rates, and the government delivers fiscal stimulus, what else is there on the table?" asks Every.

The rule of thumb is that an RBNZ rate hike would be supportive of the New Zealand Dollar; however, concerns will immediately be raised about how rate hikes might deepen the country's recession.

If this were to be the new market narrative, rate hikes could prove detrimental to the Kiwi Dollar.

What is certain is that volatility is in store for the Kiwi next week.