In the early hours of Wednesday November 13 at 1am GMT, the Reserve Bank of New Zealand (RBNZ) will release its OCR decision and its rate statement, followed in one hour by the RBNZ Press Conference.
There is greater division surrounding this month’s decision by the Reserve Bank of New Zealand. The markets are only pricing in a cut in the Official Cash Rate (OCR) from 1% to 0.75% by about 70% probability, with a 30% probability that there would be no action at all. Even market research giants Westpac have been forced to change their outlook on the matter severally.
Those who believe that there will be a rate hold point to August’s 50bps cut which exceeded market expectations, recent data which have not been as bad as previously feared, and indications from the RBNZ that the hefty cut it made in August is producing the desired effect on the economy.
But there are those who believe that the RBNZ will cut by 25bps, and they will point to the survey conducted every quarter on Inflation Expectations by the RBNZ. This survey is a poll of businesses in New Zealand, trying to find out what they think inflation would be over a year or two. The figure which measures inflation expectation over the next 2 years is considered more valuable.
The latest quarterly Inflation Expectations report that was released earlier today indicates that Inflation expectations only grew by 1.66% (1 year) and 1.8% (2 years), as against the previous figures of 1.71% and 1.86% respectively.
The last time we had a drop in the Inflation Expectations was on August 6, a day before the RBNZ came down hard with its radical 50bps cut. Then, the expectations fell from 1.97/2.01 for the 1yr and 2year figures to 1.71% and 1.86% respectively.
This may therefore be a case of recent history about to repeat itself, with the lower inflation expectations providing the room that the RBNZ needs to implement one more cut before the year runs out.
Outlook for NZD Pairs
I would expect to see some heavy volatility if the RBNZ decides to hold fire. This may be positive for the NZDUSD or NZDJPY. If a 25bps rate cut is performed, there may be muted downside on the NZD pairs as the markets have already priced it in.
The focus would be on the press conference which comes up at 2am GMT. The crux of the matter to be discussed at the press conference is the future of interest rate policy heading into 2020 and beyond. Many leading economists such as ASB’s Mark Smith and BNZ’s Craig Ebert all see rate cuts down the road in 2020.
If the RBNZ Governor opens the door for future cuts by referring to continuous downside risks (from lower global economic growth or more domestic conditions such as inflation from business activity or house price inflation), this could be NZD-negative. Do not forget: the RBNZ has been pre-emptive with its rate policy in 2019 and may want to extend that into 2020.
Please be mindful of the impact of President Trump’s speech on the US Dollar. This may extend into the Asian session and becloud any trade opportunities on the NZDUSD. If this is the case, you may be better served trading the NZD against other currencies that will have no fundamentals impacting their price movements at the time.
Let’s all wait to see what the RBNZ has for us in a few hours.