RBNZ needs a reality check

NZD: Higher trading range

A general trend as we approach the end of the current cycle is that a hawkish hold supports currencies far more than a dovish hike. We saw that play out with EUR and GBP in September when ECB’s dovish hike saw EURUSD plunge 0.8% on the day of announcement while GBPUSD was down a more modest 0.4% on the day of BOE’s hawkish hold. Likewise, AUDUSD fell 0.8% on November 7 after the RBA’s dovish hike, and today’s significant hawkish tone from the RBNZ could bring NZD in a new higher trading range. No doubt the broad dollar trend also plays its part, but central bank communication has been a key focus for market participants to gauge who can start to cut rates first in 2024.

RBNZ kept rates unchanged at 5.50% today, but its forecasts lifted the peak of overnight cash rate to 5.69% from 5.59%, and no rate cuts were shown until mid-2025. The central bank remained concerned about inflation and does not rule out further rate hikes.

However, the problem here is that the data that RBNZ looks at is mostly outdated. Both inflation and labor market data in New Zealand is still reported only on a quarterly basis. Q3 CPI cooled more than expected to 5.6% YoY, and there has been no fresh inflation data available since its release on 17 October. Next inflation release is only on 24 January. Likewise, labor data reported on 1 November showed unemployment rate picking up to 3.9% in Q3 from 3.6% earlier and the Q4 update is scheduled for release on 7 February. Next RBNZ decision is also only due on 28 February, suggesting market will have time to continue to price in the hawkishness seen today.

Even the migration data that is making the RBNZ more confident about the economy right now, could be just a short-term boost driven by post-pandemic return of students and immigrants. These assumptions could continue to support RBNZ rate path repricing higher, and push NZD higher for now until new data becomes available. NZD will also continue to be a big beneficiary of the dollar weakness as Fed pivot bets continue to gain traction. Next key catalyst for dollar will be the jobless claims and Powell’s comments on Friday.

Market Takeaway: NZDUSD has shifted into a higher trading range after crossing its 200DMA and lack of data in the near-term as well as dollar weakening trend could bring a test of 61.8% fibo retracement at 0.6246 ahead of 0.6350.

NZDJPY: Carry trades could shift more in favor of Kiwi

As USDJPY carry trades get more expensive due to the sharp fall in Treasury yields, there could be room for some of those carry trades to be diverted to NZD given its high yield and a still-hawkish central bank stance. NZDJPY rose to its highest levels since 2015 at 91.22, and Saxo’s intraday FX positioning shows a 63% long position on the cross. Below chart shows a widening divergence between yield gaps of New Zealand/Japan and US/Japan.

Market Takeaway: NZDJPY cleared key resistance at 90.87 to touch 8-yea highs, and more carry trades could move in NZD’s favor as Fed members give up their hawkish stance earlier than RBNZ.

AUD: Peak rate speculation gaining traction on softer CPI

Australia’s October CPI came in below expectations at 4.9% YoY from 5.6% previously and 5.2% expected. However, AUD initially rallied despite this softer-than-expected print as inflation remains above target and the RBA's tolerance remains quite low, but rate hike bets were pared and that eventually brought the AUD lower. Policy divergence became clearer for AUDNZD, which plunged sharply to six-week lows of 1.0723 from 1.0830. Trade signals suggest support level of 1.0774 is approaching.

However, digging into the details of the CPI report suggest underlying pressures are still intact. Trimmed mean inflation remained unchanged at 5.2% in October. This will mean that hawkish shifts in RBA pricing still remain likely. Besides, dollar is still the dominant theme and offsets any impact from local policy moves. This could mean AUD gains could remain likely until the USD turns.

Market Takeaway: CPI undershoot has opened room for taking off RBA rate hike pricing left in the curve, but AUD impact may remain temporary as dollar weakness remains the dominant theme.