- RBNZ is this week's highlight
- NZD is best performing major of past month
- Thanks to global investor improvement
- RBNZ expectations also supportive
- Market split on expecting 50 or 75bp hike
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The New Zealand Dollar's week will be dominated by the interest rate decision at the Reserve Bank of New Zealand (RBNZ).
The RBNZ interest rate decision is due at 01:00 GMT on Wednesday and markets are torn between expecting a 50 and 75 basis point interest rate hike.
Arguments for a New Zealand Dollar-supportive 75bp hike include strong labour and wage data and elevated inflation, arguments for a 50bp hike include the rapidly slowing housing market.
"A 50bp hike may be received as a slightly dovish surprise by markets," says Francesco Pesole, FX Strategist at ING Bank.
Such a dovish outcome would be consistent with a weakening in the New Zealand Dollar.
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The New Zealand Dollar enters the decision backed by a rally in global equity markets amidst an easing in investor pessimism which takes it to 0.6130 against the U.S. Dollar, the exchange rate has now completed five consecutive weeks of advances.
The Pound to New Zealand Dollar exchange rate starts the new week at 1.9378 as a long-running sideways chop continues. Those transferring Sterling into NZ Dollars using their bank are looking at rates at around 1.8835, those doing so with a competitive payment provider would receive approximately 1.9320 according to our data.
However, a 50bp hike might not result in a selloff if the RBNZ's tone turns out more 'hawkish' than expected.
"If this is accompanied by a hawkish rate path projection – i.e. peak rate around 5.0% – the overall message should remain quite hawkish," says Pesole.
"We think the Kiwi dollar could rise after the announcement, even though we don’t expect the impact to prove long-lived, as external factors should continue to prevail," he adds.
Ahead of the event, the New Zealand Dollar is the best-performing major currency of the past month, with gains of 7.0% coming against the U.S. Dollar, 2.17% against the Australian Dollar, 1.9% against the Euro and 1.50% against the Pound.
Much of this outperformance is down to the improved global market environment as investors sense the Federal Reserve will start slowing down its rate hiking cycle, therefore how markets evolve over coming days will be important for the Kiwi.
But the gains are also the result of a repricing higher of New Zealand interest rate expectations by investors.
A clear upside risk to the New Zealand Dollar would therefore lie with a decision to go with a bigger rate hike. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)
Inflation, now reading at 7.2% year-on-year, has proven more resilient than forecasted, unemployment remains low (3.3%) and wage growth has accelerated (2.6% quarter-on-quarter).
This has led money markets to anticipate 63bp of tightening at the meeting, in essence making it a 50-50 split for a 50bp hike or a 75bp hike.
This means that whatever the outcome, there will be enough of a surprise factor to potentially move the New Zealand Dollar.
"With little room for delay, we think that the RBNZ will deliver a larger 75 basis point increase in the OCR this time, taking it up to 4.25%," says Michael Gordon, Acting Chief Economist NZ at Westpac.
Westpac now expects the Official Cash Rate to reach a peak of 5%, most likely in the early part of next year.
"With the cash rate at 3.5% today, that implies the RBNZ is still some way from where it needs to be," says Gordon.
On the day, Gordon says interest is likely to be in what the RBNZ signals for the months ahead.
"It's not certain whether their projected OCR track will go all the way up to 5% this time, but it is likely to be substantially higher than the 4.1% peak that they projected in August," he explains.
Looking further ahead to 2023, the extent of the country's house price decline could prove a crucial determinant of New Zealand Dollar value.
"Whether the RBNZ will effectively bring rates to 5.0%+ is another question. We are not fully convinced, as an expected acceleration in the house price contraction and further worsening of external conditions in the months ahead may force a dovish turn in early 2023," says Pesole.
New Zealand's house price index registered a 4.5% quarterly decline in October, ensuring this market downturn has now exceeded the worst quarter during the Global Financial Crisis period.
Projections contained in the RBNZ’s August statement showed the Bank's economists expect a steeper and quicker decline of 15% from December 2021 to the trough, which is worse than the previous forecast in May.
"We expect further deterioration to the housing outlook as lending activity continues to fall and more borrowers face higher rates when re-mortgaging," says Pesole.