Looking for more central bank trading events?
The Reserve Bank of New Zealand (RBNZ) is dropping its May monetary policy decision next week!
Here are some points to note if you plan to trade the New Zealand dollar during the release:
Events under the microscope:
Reserve Bank of New Zealand monetary policy statement
Reserve Bank of New Zealand Quarterly Monetary Policy Evaluation
Quarterly Reserve Bank of New Zealand press conference
When will it be released:
May 24, Wed: 2:00 AM BST Press the button to continue in an hour.
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The RBNZ raised the OCR by 25 basis points from 5.25% to 5.50%.
- The RBNZ’s new forecasts may reflect lower inflation, a tightening labor market, and higher growth compared to the February estimate
Relevant New Zealand data since the last RBNZ statement:
🟢 Arguments for Tight Monetary Policy / New Zealand Dollar Bullish
BusinessNZ Manufacturing Survey It rose slightly from 48.1 to 49.1 in April but is still below the long-term average of 53.0. While still indicating deflationary conditions, a turn may indicate a bottom in those conditions
New Zealand Employment Quarterly Change up 0.8% in the first quarter vs 0.5% expected and prior, Unemployment rate held steady at 3.4% vs 3.5% expected
New Zealand business managers Expect annual inflation to be 4.28% next year, down from 5.11% in the RBNZ’s Q1 survey.
Reserve Bank of New Zealand Financial Stability Report Note that “New Zealand’s financial system is in a good position to deal with it Increased interest rate environment and turmoil in international financial markets“
New Zealand visitor arrival The 0.6% m/m mark is higher in February after declining by 26.3% in January
🔴 Arguments for loose monetary policy / bearish NZD
BusinessNZ Service Performance Index It fell 4 points from the previous month to 49.8 in April 2023, and fell in contraction for the first time since February 2022.
ANZ New Zealand commodity prices fell 1.7% month-on-month in April versus a previous gain of 1.3%, as exporters’ freight rates continued to slide
Q2 CPI It eased from 1.4% to 1.2% qoq versus the expected increase to 1.5%, dampening the RBNZ’s hopes as energy prices tumbled.
New Zealand food price index It rose 0.8% month-on-month in March, after the previous increase of 1.5% to indicate a slowing in consumer price pressures.
BusinessNZ Services Index It fell from 55.8 to 54.4 to reflect the slower pace of growth in March, as the economy slowed and general uncertainty emerged in
BusinessNZ Manufacturing Index It fell into contraction, posting a reading of 48.1 in March after a reading of 51.7 in February.
Previous issues and the impact of the risk environment on the New Zealand dollar
April 5, 2023
Excessive NZD vs. Major FX Planned by TV
Action / Results: The Reserve Bank of New Zealand surprised the markets with its 50 basis point official cash rate (OCR) from 4.75% to 5.25% when it increased the rate for traders by just 25 basis points. Moreover, the central bank maintained its hawkish stance, saying: “Inflation remains very high and persistent, and employment is well above its maximum sustainable leveland that the financial system of an economy can “run” during a period of slower activity.
The surprisingly hawkish decision sent the New Zealand dollar to fresh intraday (and over the week) highs against its major peers. But the lack of further stimulus also limited the upside momentum of the New Zealand dollar. The currency gave up most of its gains and capped the day only slightly higher than its daily opening prices.
Risk Environment and Internal Market Behaviors: Weak trading volume ahead of the Easter holiday plus fresh PMI data supporting recession fears in the US and other major economies curbed demand for “risky” bets such as the New Zealand dollar.
February 22, 2023
Excessive NZD vs. Major FX Planned by TV
Action / Results: As expected, the RBNZ raised the OCR 50 basis points from 4.25% to 4.75%, the highest level since January 2009.
The central bank also signaled further rate hikes and said the RBNZ staff needed to “OCR needs to get to a level that the committee is confident will reduce actual inflation.” to the target range.
The New Zealand dollar rose after the upbeat RBNZ news but quickly found resistance around the inflection points of the previous US session. It finally extended its daily bullish trend against the Australian dollar, the euro, the Swiss franc and the British pound, although traders remained on the sidelines ahead of the FOMC meeting minutes.
Risk Environment and Internal Market Behaviors: Steady inflation readings and green shoots in global PMI reports prompted traders to raise interest rates from major central banks. This limited risk appetite and weekly gains for the New Zealand dollar ahead of the core PCE report in the US on Friday.
price movement probabilities
Possibilities of feeling risky: The RBNZ will print its decision in the middle of the week, after PMI reports from the Eurozone, the UK and the US but before the FOMC meeting minutes and a second reading of US GDP for the first quarter of 2023. The US debt ceiling crisis is also having a noticeable impact on Broad risk sentiment in recent weeks, so there are developments to watch when gauging risk appetite/risk aversion.
This means that the markets’ reaction to the RBNZ event could play into dominant market themes already in place and extend the NZD’s intra-week trends, or could provide a short-term pullback for the major NZD pairs if the environment goes against normal NZD risk trends ( For example, a broad risk-averse environment could mean a decline in the New Zealand dollar despite bullish catalysts/themes for the New Zealand dollar).
New Zealand dollar scenarios
Base case: Low inflation expectations, rising labor supply caused by immigration, and government inflationary spending plans support a hardcore hike RBNZ scenario.
That is, the central bank may raise interest rates by 25 basis points to 5.50% as expected And Hint at a rate hike at least once in the foreseeable future.
However, the New Zealand dollar’s reaction may be short-lived as traders prepare for the FOMC and US GDP. If NZD gives up most of its highs/lows after the report as it has in the last two releases, then the NZD is better off trading against its peers such as the US dollar, Australian dollar and Swiss franc.
Alternative scenario 1: If the RBNZ surprises the markets with a 50bp rate hike, we could see a sharp rally in the NZD and possibly continue higher against some pairs.
As in the base case scenario, strong moves for the New Zealand dollar are more pronounced against safe havens like the US dollar and Swiss franc and against the Australian dollar, especially if the general market environment is risk-averse.
Alternative scenario 2: In the low probability scenario that the RBNZ stops any rate change, we may see traders dump the NZD, especially if it makes another push higher against the majors leading up to the event.
The New Zealand dollar saw a strong and broad-based rally in May, likely due to expectations of a rate hike, so it makes sense that some traders would take profits from the event.
If the environment is risk-free during the release, the NZD/JPY could see a larger decline, especially since the yen was one of the weaker currencies against the New Zealand dollar in May, as well as the euro.
If the environment is risky in the scenario, the New Zealand dollar could lose more of its gains against the Canadian and Australian dollars on issuance.
