After watching the Reserve Bank of Australia cut interest rates to a record low level last week, it appears a near-certainty that the Reserve Bank of New Zealand (RBNZ) will do the same early on Thursday morning.
To put it bluntly, every man, woman and child who has access to a trading screen thinks that the RBNZ will cut rates from 2.25% to 2.0% at the conclusion of its August meeting.
Interest rate markets are fully priced for a 25 basis point cut, a view shared by every economist polled by Bloomberg.
It’s a given. Baked in the cake, to borrow one of my favourite trading analogies.
Given a rate cut is seen as a certainty, Annette Beacher, TD Securities’ chief Asia-Pacific macro strategist, believes the rate cut will be “largely irrelevant”, suggesting that market movements, particularly the New Zealand dollar, will be driven by the language and forward guidance offered by the bank it the accompanying monetary policy statement.
Along with cutting rates, Beacher believes that the RBNZ must do three other things in order to place downward pressure on Kiwi bond yields and dollar.
In June, the RBNZ said “the exchange rate is higher than appropriate given New Zealand’s low export commodity prices … this is holding down tradables inflation. A lower NZD would … assist the tradables sector”.
These phrases were swamped by the bank’s concerns about house price inflation and financial stability, hence the markets swiftly dismissed the jawboning and AUD/NZD plunged to 1.04. Even if the RBNZ next week repeats an explicit easing bias “further policy easing may be required …” we don’t see a repeat of this phrase in isolation as being effective.
Even stronger language like “further depreciation is likely and necessary” is unlikely to keep pressure on the currency either.
Instead, we need to see a downshift in the bank bill profile hinting at the potential for rate cuts into 2017. This can then be backed up with the well-worn phrase “the higher exchange rate implies a lower cash rate path than we previously thought”.
Maintain an easing bias, indicating that rates are likely to move lower again in the period ahead, talk down the New Zealand and lower its forecast path for the 90-day bank bill rate within its economic projections.
Beacher suggests that this is “the only combination that can keep downward pressure on swap and bond rates, and the NZD”.
She also notes that a failure to lower the 90-day bank bill forecasts will be a “disaster for the NZD”, sending it screeching higher.
Given the buoyancy of the New Zealand dollar of late, it’s hard to disagree with her view. The decision is the RBNZ’s to fumble.
The RBNZ rate decision will arrive at 9am in Wellington (7am AEST) on Thursday morning.
Here’s how the New Zealand dollar trade weighted index is currently tracking compared to the forecasts offered by the RBNZ in June.