Tuesday, February 11, 2020

RBNZ looks likely to keep rates on hold, but will it adopt a dovish bias?

  • Dollar
  • NZD
  • Reserve Bank of New Zealand


Analysts’ Pick: RBNZ looks likely to keep rates on hold, but will it adopt a dovish bias?

  • Kiwi likely to strengthen slightly if RBNZ puts rates on hold
  • The coronavirus outbreak and possible cooling in rental prices may cause the RBNZ to adopt a more dovish bias, which will consequently drag on the New Zealand dollar
  • NZD/USD is expected to rise slightly to 0.6411 as a result before falling to range between 0.6366 and 0.6381

Better-than-expected economic data, improving business confidence and additional fiscal stimulus from the government in New Zealand is likely to deter the RBNZ from cutting rates at tomorrow's monetary policy meeting at 9am (GMT +8). The central bank will likely instead continue its pause on monetary policy and possibly revise its economic outlook downwards to reflect the effects of the coronavirus outbreak in China.

2019's 4Q inflation in New Zealand surprised investors, rising to 1.9% YoY from 1.5% in 3Q, above the Bloomberg median economist forecast of 1.8%. The main drivers of the better-than-expected headline inflation was housing and housing utilities, food, and alcoholic beverages and tobacco.

Housing rental drove annual inflation, while transport boosted quarterly inflation



Specifically, rising rents drove the housing and housing utilities pricing index group higher, with rental prices increasing 3.1% nationwide in the year to December 2019 and 0.8% in the three months to December 2019. Rental in Wellington rose the most since 2006, spiking 4.5% likely due to rental shortages and landlords passing on increased costs from property upgrades done to comply to the new Healthy Homes Standards introduced in July 2019. But record high rental prices may not be able to be sustained as an increase in building permits (+9.9% MoM in December) and a possible slowing in population growth (Annual immigration in May was revised lower by 9,400; Annual immigration in October estimated at 43,000 while previously reported to be estimated at 55,600; Population grew slower at 0.32% for the three months ended in September 2019 compared to the 10-year average of 0.34%)) signals that there may not be an extended shortage for rentals.

Rental prices across New Zealand rose in 4Q 2019


Unemployment fell to the 10-year low while business sentiment spiked in the final quarter of 2019. Unemployment rate dropped to 4.0% from 4.2% in 3Q, below economists' forecast of 4.2%. In addition, business sentiment looks to be improving, with Decembers' business confidence index rebounding to -13.2, the highest reading in New Zealand since October 2017.

Mostly positive data in New Zealand should deter RBNZ from easing policy


While additional fiscal support from the New Zealand government is expected to provide a boost to the economy, the coronavirus outbreak will likely weigh on demand for New Zealand's produce. The additional spending of NZ$12bn on infrastructure is expected to boost real GDP growth by 1.4 percentage points through June 2024. But a sharp decline in the Chinese economy as a result of the coronavirus outbreak and consequently demand on New Zealand and Australia's exports (China and Australia are New Zealand's top two trading partners) may delay the effects of the fiscal stimulus to the latter half of the government's four-year forecast.

China and Australia remain New Zealand’s top 2 trading partners in total trade, exports and imports


Coupled with a likely cooling of rental prices in the country, we expect the RBNZ to hold its current rates for the upcoming meeting with a possible downward revision to its outlook or a more dovish bias to future monetary policy.  This will likely allow the kiwi to inch slightly higher against the dollar before falling back lower as financial markets have only priced in a 9.2% probability of a rate cut for tomorrow's meeting but an 81.2% probability of a rate cut by the end of 2020.

Overnight Index Swaps (OIS) implied probabilities shows markets expects the RBNZ to hold rates unchanged


As a result, NZD/USD may inch higher to 0.6411's level before falling back down to range between 0.6366 and 0.6381. There will likely be some risks from movements by USD resulting from the coronavirus outbreak and Powell’s Presentation of the Semiannual Monetary Policy Report to Congress later today. The coronavirus should continue to apply pressure on the New Zealand dollar and lift demand for the greenback, but no large movements are expected from this risk. Powell’s report should be relatively similar to the Fed’s current stance on monetary policy, which is to keep monetary on pause, especially since economic data in the US has been mostly positive in the recent months. This means that Powell’s testimony to Congress is unlikely to have a large impact on the greenback.





Effect on NZD/USD

RBNZ hold rates; adopt dovish bias or revises outlook slightly downwards

Rise toward 0.6411 before falling back to range between 0.6366 and 0.6381


RBNZ hold rates; maintains current stance

Rise to 0.6411’s level


RBNZ cut rates

Falls past 0.6366 to 0.6345’s level

*Source: ADSS




Technical Analysis:         








The kiwi is currently on a downtrend and is likely to continue as a result of the expected economic impact from the coronavirus outbreak. But there is some upside potential for the kiwi as RSI indicates that the New Zealand dollar has been oversold, implying that there may be a possible slight recovery for the currency. But bears will likely continue using momentum to apply pressure on NZD/USD to retest the support levels. Expect the currency pair to trade in the 0% to 23.6% Fibonacci retracement level range in the medium-to-long term. If tomorrow’s RBNZ monetary policy meeting is within expectations, the bears will likely push the New Zealand dollar lower to break the 0.6381 resistance level to range between 0.6366 and 0.6381.




Support: 0.6381 / 0.6366 / 0.6345




Resistance: 0.6412 / 0.6451 / 0.6498




NZD/USD Chart (H4)