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RBNZ face challenging decision on Thursday

RBNZ face challenging decision on Thursday

By Garry Dean (Sales Trader, CMC Markets New Zealand)
10 June 2014

The key focus for the New Zealand dollar will be the Reserve Bank on Thursday morning, with the market widely expecting the OCR to be increased 25 points to 3.25%. The variance among market forecasters sits around the revisions contained within the June Monetary Policy Statement, and more importantly the projected trail of OCR increases going forward. While Governor Wheeler’s forecasts in March suggested an OCR at 4.50% by the end of 2015, the market has digested a number of weaker economic releases over the past three months, and are currently pricing-in a rate closer to 4.00% at this time.

This expectation of more moderate OCR increases has led major trading banks to reduce two year fixed mortgage rates by over a quarter of a percent in the past couple of months, and this creates headwinds for the RBNZ in their battle to control non-tradable inflation pressures. The RBNZ decision is certainly a tough call given the declines seen in both business and consumer confidence recently, combined with the 23% collapse in dairy prices over the past four months, but a significant easing in OCR projections would potentially fuel another surge in the housing market. The inability of the government to appropriately address the key factors behind the surge in Auckland property prices has left the Reserve Bank Governor with a major dilemma, and one which is extremely hard to resolve through the use of LVR restrictions and OCR increases.

With the RBNZ only likely to adjust their interest rate projections slightly, there is a risk the market has adopted too dovish a tone, with interest rates and the Kiwi at risk of adjusting higher post the announcement. We saw the Kiwi rally significantly following the first two OCR hikes in this cycle, resulting in a threat of currency intervention from the RB Governor in early May, but potential exists for a similar short-term spike in the currency post the announcement. A bearish technical picture of the Kiwi had been building with the break of key support at 0.8500 at the end of May, but recent spikes to 0.8555 have clouded this view, and leaves the door open for a renewed push higher if the RBNZ disappoints the market on Thursday.

ENDS

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