NZD: Reserve Bank event risk - Nomura

Peter Dragicevich, Global FX Strategy at Nomura, notes, "The 9 February Reserve Bank of New Zealand (RBNZ) meeting poses a short-term event risk for NZD. New Zealand’s economic fundamentals, higher commodity prices, and positive global sentiment have supported NZD in early 2017. We expect this to remain the case over the medium term, but in the short term, we see risk of a NZD pullback given the skew in market positioning if the RBNZ leans against the current market pricing for the start of the tightening cycle. This is currently for late 2017, but we do not expect the first RBNZ rate hike until 2018." 

Key Quotes

"NZD has outperformed over the early part of 2017, with the NZD trade-weighted index (TWI) now near its highest level since April 2015. New Zealand’s economic momentum, signs of broadening inflation pressures, elevated commodity prices and a shift in market pricing to RBNZ rate hikes in late 2017/2018 have combined with the improving global economy and upbeat risk sentiment to support NZD."

"While we continue to have a constructive view on the currency over the coming months given the macro backdrop, particularly against AUD and GBP from a tactical perspective we see scope for a near-term pull-back – given elevated net long NZD exposure."

"The main risk event is the 9 February RBNZ meeting, at which it is widely expected to keep its policy rate at 1.75%. The main focus will be on its updated economic projections and balance of risks. The upswing in global inflationary pressures and the pick-up in New Zealand inflation metrics should be a comfort for the RBNZ, as should the more positive global picture, New Zealand’s economic momentum and lift in commodity prices."

"The frothy housing market, point to the next move being a hike. We believe this is a story for 2018 and not late 2017 as currently priced in. This is where we see the near-term danger for NZD. The meeting will be a delicate balancing act and a communication challenge, as an overtly hawkish tone would propel NZD even higher, in our view." 

"Moreover, given the rise in the NZD TWI and the headwinds this generates to inflation, we also anticipate the RBNZ to reiterate its previously stated thoughts that NZD is “higher than is sustainable” and that a “decline in the exchange is needed.” Although this is not new information, and in isolation should generate a limited NZD reaction, use of such language in combination with a near-term interest rate outlook that is more conservative than the market is pricing, mixed with the skew in current market NZD positioning may interlink to undermine NZD in the short term." 

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