Key considerations for the Kiwi ahead of tomorrows RBNZ meeting

At 11 am Sydney time tomorrow, the RBNZ will announce either a 25bp or an inflation-busting 50bp rate hike in what will be a very close call.

It’s been six weeks since the last RBNZ MPS meeting when the RBNZ hiked the OCR by 25 bps for the third consecutive time to 1% and provided the following hawkish surprises.

1. The RBNZ noted that the decision between a 25bp and 50bp hike was “finely balanced.”

2. It increased the OCR peak forecast by 75bp, from 2.6% to 3.35% and

3. It pulled forward expected hikes.

The interest rate market is almost fully priced for a 50bp hike tomorrow and has priced in an OCR cycle peak of 4.0%, well above the RBNZ’s forecast of 3.35%. The arguments to support a 50bp hike are as follows.

Inflation is at 30-year highs and rising, the labour market remains tight, and wages are rising. There is a risk that higher inflation expectations become entrenched, threatening the RBNZ’s very credibility.

Countering the need for a 50bp hike and since the last meeting, housing, consumption and business survey data has been weaker, including this morning’s NZIER business confidence data which dropped from -28 to -40 on concerns over the spread of Omicron and…..rising inflation.

We hold a very slight preference for a 25bp hike. Assuming the RBNZ’s peak forecast of 3.35% remains unchanged, it should see the NZDUSD fall from its current price of .6810 towards support at .6750/30.

If the RBNZ delivers on the current market pricing of a 50bp hike and indicates that its peak forecast is now higher than 3.35%, expect the NZDUSD to bounce towards resistance at .6910 coming from the 200-day moving average.

Source Tradingview. The figures stated are as of April 12th 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation