Tuesday, June 23, 2020

The RBNZ looks likely to keep monetary policy on hold at tomorrow meeting but how much upside is there for the Kiwi?

  • NZD
  • Reserve Bank of New Zealand


Analysts’ Pick: The RBNZ looks likely to keep monetary policy on hold at tomorrow meeting but how much upside is there for the Kiwi?

  • RBNZ officials will likely welcome the better-than-expected economic conditions domestically
  • But high levels of uncertainty that every country is facing in terms of economic impact and a potential second wave of Covid-19 infections are likely to deter the central bank from tightening policy
  • There may be some dovish statement from RBNZ Governor Adrian Orr regarding the decision to help curb gains in the New Zealand dollar
  • Upside potential on the central bank’s decision as a result is likely to be limited.
  • The outlook for the Kiwi in the medium-term looks likely to face some downward pressure, although the long-term outlook for the currency remains strong

The NZD/USD currency pair may have more room to rise on the Reserve Bank of New Zealand's (RBNZ) monetary policy decision tomorrow, although upside potential for the currency is likely to be limited. The reason for the kiwi strengthening on the central bank's decision is due to the high likelihood for the central bank to keep monetary policy on hold as the New Zealand economy continues to show improvements as it maintains its resistance against the spread of Covid-19 infections within the country.

Higher frequency data has shown some signs of economic activity in New Zealand bottoming out in April


PMI data in the country has started to show improvements in both manufacturing in May and Services in April. Unemployment fell during Q1 2020, and is likely to rise in Q2 at a slower rate than expected thanks to the country's success in curbing the spread of the Covid-19 pandemic. As per its statement at its last meeting, the outlook for the New Zealand economy is likely skewed closer towards its more optimistic scenario, since its trading partners (US, China, Australia) has been able to reopen their respective economies to a certain extent. Despite a better-than-expected outlook the central bank is likely to continue to err on the side of caution and keep monetary policy at current levels instead of hiking rates or reducing its balance sheet.

New Zealand has been able to effectively control the spread of Covid-19 within the country


As a result, we don't expect any changes from policy makers. The RBNZ's statement for tomorrow's meeting is also likely to note of the positive developments in terms of consumer spending, which should be boosted by the reduction of domestic Covid-19-related fears. But the central bank is also likely to note that uncertainty remains high, especially as the US and China experiences some spikes in Covid-19 infections in certain states. Another consideration for the central bank will be the unexpected strength of the New Zealand dollar, which has gained roughly 8% since the central bank's last meeting in May. The gains in the New Zealand dollar is likely a result of both the optimism in financial markets for a global economic recovery, as well as a faster-than-expected elimination of the Covid-19 pandemic, which should help the New Zealand economy remain less affected economically when compared to other countries. The strength of its currency however, will likely influence the RBNZ's decision to skew its statement to sound more dovish to help prevent the New Zealand dollar rising and putting more pressure on exports given the already weak global demand for commodities as a result of the Covid-19 lockdowns.

NZD/USD has strongly recovered since the RBNZ’s last meeting during mid-May


While traders are likely expecting no cuts to the RBNZ's official cash rate, we do still expect some upside pressure on NZD/USD as a result of the more positive outlook from the bank, possibly sending the currency pair towards 0.6527's level. It is likely that RBNZ Governor Adrian Orr will sound more dovish in his press conference following the decision however, which should limit the upside potential for the currency pair.

Overnight Index Swap show that only an implied probability of 8.7% for a rate cut is factored into current prices, signalling that there is little upside potential if the RBNZ keeps rates on hold


Over the week, the New Zealand dollar looks more likely to regress back down towards its 200-day moving average as news starts to focus on spikes in Covid-19 infections and its impacts instead. Over the medium-term however, the outlook for the New Zealand dollar is likely still skewed towards the upside as a result of the country's ability to eliminate the spread of Covid-19 infections, which should positively impact its economy which includes possible exclusive travel availability to multiple other countries that have had success in limiting the spread of the Covid-19 pandemic domestically.

Technical Analysis:


NZD/USD is still maintaining its overall uptrend cycle since the end of May and looks unlikely to give up its gains anytime soon. Bulls may get another change to push the currency pair further above the 100% Fibonacci to solidify the uptick following tomorrow’s monetary policy decision towards 0.6527’s level, but potentially dovish statements from the Governor Orr may put some pressure on the currency to fall back towards 0.6448. It is generally unlikely that the bears will be favoured by tomorrow’s monetary policy decision however. In the medium-term, the currency pair may show some downside potential closer towards the 200-day moving average as it returns some of its gains from the past week. In the longer-term fundamentals are likely to continue to favour the bulls, as the New Zealand economy benefits from its successful efforts in curbing the spread of Covid-19 infections domestically and reaps the benefits of the greenback weakening as downside risk starts to ease in the long-term.

Support: 0.6433 / 0.6381 / 0.6294

Resistance: 0.6527 / 0.6563 / 0.6631

NZD/USD Chart (H4)