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NZD inching higher towards 0.74 against the dollar as the RBNZ has been scheduled for its monetary policy meeting on this Wednesday to decide overnight cash rates followed by press conference.
The Ready Reckoner quantifies the impact of the various 'shocks' that have hit the New Zealand economy since the last Monetary Policy Statement, in terms of the likely impact on the RBNZ's interest rate forecast.
The November Monetary Policy Statement projected an Official Cash Rate of 1.7% (rounded to one decimal place), suggesting a mild chance of a further easing but otherwise consistent with the OCR remaining on hold for an extended period. Developments since then have been mixed, with higher inflation and commodity prices, but tighter than expected financial conditions. On balance, these developments don’t suggest that the RBNZ will need to change its policy bias one way or another in February.
NZDUSD short-to-medium term perspectives: Momentum remains positive, targeting the 0.7400 area next (Nov high) if it can clear 0.7350.
In next 1-3 months: The month ahead could see NZDUSD extending beyond 0.7500 (Sep highs) if the US dollar continues to register disappointment in the Trump Administration’s policies. Further ahead, though, the Fed’s tightening cycle plus US fiscal expansion should maintain upside pressure on US interest rates and the US dollar, pushing NZDUSD lower to 0.7000. Granted, the NZ economy is strong and dairy prices have risen, but these forces are subservient to the US dollar’s trend.
NZDUSD long-term perspectives: Slide up to 0.68 levels cannot be disregarded. The US dollar has had a remarkable bounce since the US polls and has potential to rise further in the months to come. The Fed’s assertive tightening projections plus US fiscal expansion should maintain upside pressure on US interest rates and the US dollar. Against that, the NZ economy is strong and dairy prices have risen, but these forces are subservient to the US dollar’s trend.
We expect NZD to fall through this year, reaching 0.62 at year-end. The support to growth from migration will fade, while the RBNZ at the least are likely to stay pat at steady OCR as inflation normalizes, pushing real rates materially lower we think.
The economy is also now subject to credit tightening through numerous channels: macro-prudential constraints, widening mortgage rate spreads, and banks’ discretionary tightening of credit criteria to businesses. This creates the space or the need for the OCR to fall and drag NZD with it while preserving monetary conditions.
