NZD: RBNZ on Edge - ING
Research Team at ING, favours a stable rates from the RBNZ, but it looks as though it will only be a temporary pause.
“The Reserve Bank of New Zealand is expected to leave monetary policy unchanged again this week (Thursday morning in NZ, Wednesday evening in Europe). We think it is closer than Bloomberg’s survey showing 3 out of 16 economists looking for a rate cut implies. On balance though, we agree that the RBNZ will instead wait until the 9 June monetary policy meeting.
The activity numbers have been performing pretty well since last policy meeting. 4Q GDP came in at 0.9% QoQ versus expectations of 0.7% while exports have been strengthening in 1Q16, house price growth remains in double digits and headline inflation for 1Q16 came in a touch above expectations. Consequently, we agree with the general market view that the RBNZ will probably hold fire at this week’s meeting, but barring any material improvement in the inflation outlook, it will probably cut rates again in June. We also believe that a further cut in 2H16 (to 1.75%) remains on the cards.
As for the currency implications, risk-reward means that we prefer to fade NZD upside on the back of a rate cut disappointment this week (our base case). A constructive risk environment is providing artificial support for the NZD, with a dovish RBNZ playing second fiddle. This is best depicted in AUD/NZD; 1Y swap rate spreads have moved 10bp in favour of a higher AUD/NZD after last month’s surprise RBNZ cut, yet the pair has traded sideways over the period. Staying long AUD/NZD is still a preferred short-term tactical play (but we are wary that the RBA could turn dovish in 2H16).
Given a currency-sensitive RBNZ and signs of overstated USD weakness, we prefer to stay short NZD/USD – noting that the pair remains particularly vulnerable to a rebound in US data (and rising US yields).”