Macro Dragon Strike Piece: RBNZ expected rate hike on Wed has now picked up noise, as NZ goes into a 3day (initial?) lock-down on one covid case. NZD 0.6917 -1.47% (Tue 17 Aug Piece)
Global Macro Strategist, Saxo Bank Group
Summary: This Macro Dragon Strike piece was sent yest, yet still very pivotal given RBNZ expected rate hike decision to 0.50% from 0.25%, which would make them the first G10 central bank to hike. For a lot of currency traders its been a tough year, and being long kiwi crosses looked (until the Covid case & shutdown news on Tue) like one of the few signals in an ocean of noise. We could be in for some binary moves in NZDUSD, NZDJPY & AUDNZD based on both RBNZ decision, outlook & of course NZ government on the covid front.
Macro Dragon Strike: RBNZ expected rate hike on Wed has now picked up noise, as NZ goes into a 3day (initial?) lock-down on one covid case. NZD 0.6917 -1.47% [Tue 17 Aug Piece]
- Please note this piece was originally mailed out yest to our VIPs, due to some technical server issues out of Asia the publishing was delayed to Wed Asia Morning (yet kiwi & factors still around same parameters). Fascinating that we can launch all kinds of rockets & vehicles all the way to Mars, solve all kinds of biological & medicinal challenges, yet connectivity between our different gadgets here on Planet earth, are still suspect. RBNZ will be meeting at 1000 SGT/HKT, 1900 PST, 2200 EST
- Well thank god for lunches, as KVP was going to drop a plain vanilla “RBNZ set to be first G10 central bank to hike by at least 25bp on Wed, back the truck up & get long Kiwi”… what a difference a few hours makes
- New Zealand’s PM Jacinda Arden has announced a 3-day lockdown after the confirmation of one case of Covid-19 in the community – so far the strain is unknown… naturally mkt would fear the delta variant or a new strain.
- But clearly this is the Covid-Shuffle, repeat & sing after KVP… “we take three steps fwd, two steps back, shuffle to the left, then shuffle to the right…”
- Immediate reaction has been some clearing of the Kiwi longs, with NZDUSD & NZDJPY down -1.50% (likely oversold for today’s session), AUDNZD 1.0531 up +0.75% (for now reversing what seemed to be a run to test 1.04. You have to understand trading currencies in the 21, has been tough… & this was supposed to be one of the fewer clearer signals out there.
- In between starting to write this piece & two conference calls, we are already back off the 0.6907 lows to 0.6930 -1.27%
So what likely next from RBNZ, kiwi crosses & overall NZ direction?
- Hard to say to be honest, yet feels intraday oversold… & definitely think RBNZ still goes on tmr with a hike of 25bp to 0.50% on Wed, 1000 SGT/CST.
- Yet with that said, there is a camp out there, that think RBNZ are going to pullback on their punches, changing back to camp dove & staying put with the rate at 0.25%.
- KVP thinks that the Kiwi’s are made of sterner stuff (never came across a Kiwi Snowflake) but hey, if we learnt anything from 2020, it’s that anything is possible.
- If they don’t hike tmr, then we are taking out 0.6900 & gunning for the 100W MA of 0.6700 & likely then some.
- Still even with a KVP hike scenario, hard to see the RBNZ script & outlook being too hawkish, as the cockroach theory is in play, we know its winter in the southern hemisphere & the delta of this 3day restriction being only 3 days is low (risk is its extended or gets smacked back on for longer, in the near future).
- So its going to be hard to be long kiwi crosses for anything more than an intraday session play… We could see a knee-jerk move up on a hike (assuming we stay around these 0.6900 lvls when it comes through), which then gets faded & reversed if the lock-down is extended &/or RBNZ file down their Hawkish talons. Naturally if the lock-down is not extended that would be bullish for Kiwi crosses.
- We also know that NZ’s (as well as AU) initial strength of isolation, is now its biggest weakness as evidenced by one of the lowest vaccination rates among the DM nations at sub 20% - for contrast SG is sitting at +75% & will likely be above +80% by E-Aug/early Sep & knocking at 90% by year end.
- Bottom line, NZ (& RoW) will need to eventually change their strategy as we’ve flagged numerous times in Macro Dragon Reflections: Is it enough of the Hammer & Dance Strategy & time to just step through the imperfect Covid-Gateway? The zero-policy covid response was a great strategy pre-vaccine… but its death through a thousand cuts & delaying the inevitable if one does change paths.
- AUDNZD which had been on a big trend lower (given combination of hawkish RBNZ vs. RBA, higher Kiwi inflation vs. Aussie & no need for tapering in NZ, not to mention extended lock-down in Australia) is having a massive reversal back above the 1.05 lvls after potentially gunning for 1.04
- Again, skew on this is likely worth revisiting post RBNZ – tactical short post decision (long kiwi), yet looking to play to long side on cockroach theory (i.e. short kiwi if its going to be more than one case in NZ & the 3-days lock-down will either be extended or smacked back on in the near-term).
- Here are the link to RBA minutes released today.
- Plus link to last RBNZ statement in May. Plus Economic Outlook.
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