New Zealand Dollar Retreats Ahead of Huge RBNZ Rate Decision This Week

February 26, 2024 - Written by David Woodsmith

STORY LINK New Zealand Dollar Retreats Ahead of Huge RBNZ Rate Decision This Week

The New Zealand dollar lost ground on Monday with a significant element of position adjustment ahead of Wednesday’s Reserve Bank of New Zealand (RBNZ) policy decision.

The New Zealand dollar to US dollar (NZD/USD) exchange rate retreated to 0.6175 after failing to bear 0.6200 while the Pound to New Zealand dollar (GBP/NZD) exchange rate posted a 2-week high at 2.0550.

Analysts are split on this month’s rate decision with a significant minority calling for a rate hike while a majority expect rates to hold at 5.50%.

According to Rabobank; “While the NZD would likely sell-off on a steady policy announcement, downside potential for the Kiwi should be limited by the perception that the RBNZ policy will be slow to remove policy restrictions.”

Rabobank a 0.61-0.62 NZD/USD range realistic in the short term.

Nevertheless, it adds; “On the view that the RBNZ will lag the Fed’s first rate cut announcement, we see scope for NZD/USD to push higher to 0.6500 on a 12-month view.”

The RBNZ decision could also have significant global expectations as any hike would be another setback for expectations of global rate cuts this year.

MUFG notes that the New Zealand dollar has been supported by stronger expectations that the Reserve Bank of New Zealand (RBNZ) will raise interest rates again.

It notes that in order to meet those hawkish market expectations, the RBNZ will have to at least deliver a signal that they are more seriously considering raising rates at upcoming policy meetings.

MUFG adds; “In the current environment we expect G10 FX carry trades to continue to perform well in the near-term. The main downside risk for the high yielding NZD in the week ahead would be if the RBNZ doesn’t back up hawkish expectations for a further rate hike.”

TD Securities expect that the RBNZ will raise interest rates again due to elevated household inflation expectations.

ANZ also expects a rate hike would support the currency, but considers the picture is more complicated; “That said, we remain guarded about the global risk environment, with geopolitical tensions at the fore and the US still sporting the equal-highest cash rate (alongside NZ) across the so-called G10 markets.”

According to BNZ, no rate increases are needed as monetary conditions are tight and doing the work. It does, however, expect that the RBNZ will strongly signal no relaxation anytime soon.

ASB and Kiwibank also expect rates will be held at 5.50%.

COT data, released by the CFTC, recorded an increase in long, non-commercial New Zealand dollar positions to 6,600 contracts from 3,400 previously, the strongest long position for close to 12 months after having been net sellers for most of the past year.

According to ING; “NZD is now an overbought currency according to speculative positioning data from CFTC, which raises the chances of investors favouring other – oversold – currencies like the Aussie dollar once the US dollar enters a stable declining path.”

ING considers that inward migration is important; “The spike in net immigration in NZ does not have obvious implications for prices but recent data suggests the inflationary effect via the housing channel is outweighing the disinflationary relief to labour supply.”

It added; “Our view that rate cuts in New Zealand won’t start before August, and that the Fed should instead start cutting during the summer translates into a bullish NZD/USD profile for the rest of the year. However, external volatility can offset the positives of a hawkish RBNZ in February and favour a near-term slide to more attractive levels for longer-term bullish positioning. We see NZD/USD breaking the 0.6500 mark in 3Q24.

Goldman Sachs is not backing a rate hike with a first cut in August.

Goldman added; With G10 rates markets pricing in something closer to a ‘higher for longer’ environment and the potential for the RBNZ to surprise market pricing to the dovish side, NZD could be vulnerable to some near-term weakness.”

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