Trading The RBNZ: Views From 11 Major Banks
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Credit Suisse: NZD Higher Unless RBNZ Over-Delivers.
The RBNZ OCR decision on Thursday presents a well-telegraphed but nonetheless difficult decision for Governor Wheeler and the Board. Having delivered escalated language around disinflation and the level of the currency in its unscheduled economic update, the RBNZ chose to address disinflationary trends, and guided the market toward pricing in their intended rate cut. Indeed, it is now more than fully priced, with an additional 8% outside chance of a 50bp cut. However, it has failed in effecting the substantial or lasting decline in the currency that it called for, with the TWI retracing almost half its losses from its local peak in July. The risk for the NZD now is that unless the RBNZ over-delivers in some way (50bp cut, extra-dovish forward guidance, escalated currency rhetoric), the market will simply bid the NZD higher in its insatiable quest for yield, and force the RBNZ to capitulate on more easing in the future anyway, while relying on ever-more onerous macro-prudential measures to rein in housing risks.
Deutsche Bank: Short-Term Risks To NZD Skewed To The Upside.
Ahead of tonight’s RBNZ meeting, market pricing is aggressive. The OIS curve even implies a 20% chance of a large 50bps cut. Further out, the curve prices a terminal rate of 1.55% by next June. While our economists agree with this, we think the short-term risks to the kiwi are skewed to the upside....Medium-term, we continue to target 1.00 in AUD/NZD since deflationary pressures as well as the commodity slump are more structurally entrenched in Australia, and as positioning and valuation are more extreme in the Aussie.
Credit Agricole: Focus On RBNZ’s 90-Day Bank Bill Rate Forecasts.
Today’s main focus will be on this evening’s RBNZ monetary policy announcement. The market is 100% priced for a 25bp rate cut and almost fully priced for a follow up rate cut by year-end. So, the RBNZ will have to sound very dovish to beat this pricing and it will likely lead to further decline in the NZD. The most important part of the MPS will be the RBNZ’s 90-day bank bill rate forecasts. The market currently looks for the RBNZ to reduce this forecast profile by 15-25bp relative to its June forecasts and this indicates a strong chance of another rate cut after next week. Elsewhere, the central bank’s rhetoric regarding the strong currency will be closely followed. In its Economic Update, the RBNZ said that further rate cuts were likely given the strong currency. Specifically, that the TWI was well above the scenario it outlined in its June MPS. So the RBNZ could limit NZD upside by continuing to tie the prospect of further rate cuts to currency strength and outlining a TWI profile declining from current levels. Elsewhere, it must be noted that speculative positioning has been broadly balanced. This in turn suggests only limited reaction potential, even in the case of a surprise.
BNPP: RBNZ Easing Fully Priced In.
A full 25bp rate cut is already priced into the markets, with a further 25bp cut priced in by Q1 2017. The RBNZ will therefore likely need to deliver a 50bp cut to weaken the NZD. We remain bearish on NZDUSD and forecast the pair at 0.65 by the year end. However, we recognise that for the pair to come under significant pressure the market will need to re-engage with the idea of Federal Reserve tightening, pushing rate spreads against the pair and undercutting the risk environment.
Morgan Stanley: RBNZ To Cut; AUD/NZD Higher.
The RBNZ will announce its rate decision on Thursday (local time). We expect the RBNZ to cut rates by 25bp but, unlike the RBA, the RBNZ is likely to provide markets with an easing bias in response to continued inflation disappointment, slowing house sales kicking in on the back of working macro-prudential measures and NZD trading higher than projected by the RBNZ. AUDNZD has further upside potential from here, in our view. The break of 1.0670 opens further upside potential to 1.0970.
NAB: RBNZ To Cut And To Signal At Least One More Cut.
With current inflation very low and the RBNZ’s inflation forecasts having to confront a NZD much higher than was previously anticipated, we anticipate the Bank to signal additional easing ahead. We anticipate at least one further 25 point cut signalled and quite possibly two such further cuts. We note that the RBNZ would not be cutting the OCR to necessarily get the NZD lower (although it has stated that it would like a lower currency), but rather it would be as much in an effort to try and generate more domestically sourced inflation to offset the disinflationary forces stemming from offshore. In addition to the release of the MPS at 9am, watch for further RBNZ commentary via the press conference at 10am and the RBNZ Governor’s appearance at Parliament’s Finance and Expenditure Select Committee due to start at 1.10pm.
Goldman Sachs: One Cut This Week And Two More Cuts Ahead.
Our economists forecast three rate cuts (this Thursday, November and March). While the cut this coming week is priced, markets price 55 bps cumulatively through March, leaving room for an idiosyncratic NZD-weaker story. While uncertainty around the Fed and broad Dollar direction could buoy the currency, we think it should underperform vis-à-vis the AUD.
Citi: RBNZ Won't 'Over-Deliver'; Buy Dips Around 200d AVG.
It seems that rate markets have fully priced impending OCR cuts, however NZD/USD continues to trade more robustly. Any cut delivered is despite reasonable growth and not because of weak growth. We doubt the RBNZ will ‘over-deliver’ and cut the OCR by 50bp, simply because the economy doesn’t warrant it. Therefore, the focus will be on forward guidance, a clear signal that more easing to come is required. Anything less would be viewed as a disappointment for the market that may drive NZD up. On balance, in this current RBNZ easing cycle it’s only the first cut that has had any significant influence on the currency, due to the surprise effect. More recently, we have seen divergent reactions to various central bank decisions. Both the BoJ and the RBA delivered additional easing recently, but saw their currencies appreciate. Whilst the BoE over-delivered, the economic circumstances cannot be compared to New Zealand. With regards to a trade, we would prefer to wait for the statement on monetary policy by Governor Wheeler, however our bias would be to buy the potential dip in NZD/USD, preferably around the 0.68 level, which coincides with a 200 day moving average
BofA Merrill: One Cut May Not Be Enough But A deeper Easing Cycle Could Be.
Despite its depreciation following dovish RBNZ commentary in July, the NZD remains at an elevated level compared to recent history. While a 25bp rate cut may not be sufficient to materially weaken the NZD in the face of strong carry-seeking flows, it seems necessary to keep monetary conditions at a stable level. The New Zealand economy might not warrant significantly looser monetary policy just yet, but neither can it afford much tighter monetary conditions due to the exchange rate. At the same time, it is worth noting that the three-month carry-to-implied volatility ratio for NZD/USD is already close to the lows seen during the global financial crisis. The relentless search for positive yield may continue, but an erosion of NZD's volatility-adjusted carry to fresh lows may be more of an impediment to appreciation than currently assumed. A sufficiently large cut to the RBNZ’s Bank Bill forecast could yet weaken the NZD further especially relative to the AUD, where it would contrast with a more stable outlook for the policy rate.
Westpac: RBNZ Would Need To Cut Rates By 50bp To Move NZD Significantly Lower.
We expect the RBNZ to cut the OCR by 25bp to 2.0% at Thursday’s Monetary Policy Statement, and to signal further easing via both the policy paragraph and a 30bp reduction in its interest rate projection. This outcome would be market neutral. We assign a 60% chance to such a scenario, which markets have more than fully priced. Indeed, there may be slight disappointment given August OIS is trading at 1.98% as we write. To move the NZD significantly lower, the RBNZ would need to lower the interest rate track by around 50bp. In this scenario (a 25% chance we think), NZD/USD would fall by 1c and the 2yr swap rate by around 10bp. An extremely dovish scenario would see the RBNZ cutting by 50bp. That would push NZD/USD 2c lower, and 2yr swaps around 20bp lower. However we see less than a 10% chance of that.
Barclays: Expect Muted Reaction On RBNZ Cut This Week.
The RBNZ meets on Thursday. We expect the central bank to cut the Official Cash Rate (OCR) by 25bp, to 2%. In an “economic update” released on 21 July, the Reserve Bank of New Zealand sent a clear signal that further monetary easing will be needed in coming meetings. The bank noted “that further policy easing will be required to ensure future average inflation settles near the middle of the target range.” RBNZ also highlighted that the trade-weighted NZD was 6% higher than it assumed in June, and despite “excessive” house price inflation, the strong NZD would not only weigh on export demand, but also push down tradable goods inflation. Therefore, the bank said, “A decline in exchange rate is needed”. With two-year inflation expectations hovering at multi-year lows and with a soft Q2 private wage report, we believe the RBNZ will deliver a rate cut at the August meeting and at another meeting in Q4 2016. With a full 25bp nearly fully priced by the market for the August meeting, we expect muted reaction on a cut. However, a dovish statement more clearly signaling further cuts in coming months could drive more significant weakness in the NZD.
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