Perception can be crucial to the performance of an asset. Traders have been focused on the Reserve Bank of New Zealand (RBNZ) having finished its hiking cycle. With other major central banks either still tightening, or potentially still tightening, the NZD has been mired in underperformance against major currencies. However, could this now be about to change? The RBNZ is set to remain restrictive in its monetary policy for some time. Could rates be held high whilst other central banks are cutting next year? This shift in perception could be a chink of light the NZD bulls need for a change of fortune.
- An unexpected hawkish hold from the RBNZ
- Interest rate expectations have moved higher
- Could this induce a rebound for the NZD?
An unexpected hawkish hold from the RBNZ
The RBNZ was expected to hold the Official Cash Rate (OCR) at 5.50% and in that regard, it did exactly as predicted. However, this decision also came with some minor hints that perhaps, just perhaps, there is a chance of one more rate hike. Furthermore, the prospect of keeping rates high for longer has also crept in.
The RBNZ interest rate is already in restrictive territory, but it will likely remain so for some time:
“The committee agreed that the OCR (official cash rate) needs to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1% to 3% target range”
The hawkish lean came from the projections of interest rates coming through 2024 and 2025. The update of the OCR track from the May meeting has been pushed out. Here is the graphic of the OCR projections from the monetary policy statement:
There are two hawkish aspects to this:
- The slight possibility of another rate hike. The track is now moving slightly higher into the first half of 2024. This is notable as it would suggest that the RBNZ sees a small possibility that they will need to hike again in the coming meetings.
- Rates will be higher for longer. In May, the track suggested that interest rate cuts would begin to be seen around December 2024. In the August meeting, these cuts have now been pushed out into Q2 2025.
The impact on interest rate probabilities
According to the monetary policy statement, the RBNZ forecasts now show an average OCR peaking at 5.59% in mid-2024 (up from 5.50% previously). This suggests that the RBNZ see an almost 40% probability of a rate hike early next year. Markets are reacting to this. The two-year swaps rate has increased by around 2bps to 5.54% (minimal, but a reaction nonetheless).
The consensus had previously been forecasting that rate cuts would begin in Q2 of 2024. This was just a few months before when the OCR track had been in May (c. December 2024). However, with the OCR track suggesting this could be 3 to 6 months later, there will now likely need to be a shift in the consensus on when rate cuts come in.
A shift of perception in the NZD
The key question is whether this now begins to shift the perception of the NZD. The Kiwi has been the notable underperformer recently. In the past month, it is the worst-performing major currency. However, there has been a strong positive reaction from NZD to the RBNZ decision today
Is this now time for a change in perception of the NZD? The Kiwi has suffered as the market has seen the RBNZ as being the first central bank to have finished its tightening. But also consider rate cuts. For example, the Federal Reserve is expected to start cutting interest rates around May 2024. The RBNZ is pushing out it projections for its first rate cut into the middle of 2025.
Subsequently, if there is now a change to the consensus on when the RBNZ will start to cut rates (perhaps pushing expectations out into late 2024 at least) then the interest rate differentials will become more favourable for the NZD.
Is it time for a rally on NZD/USD?
Will this all mean that the performance of the NZD can begin to turn around?
The technical analysis shows that the outlook for NZD/USD has been under selling pressure for the past month. However, the daily RSI has hit 30 recently, a level only seen a few times over the past year. The subsequent rebound from a low at 0.5930 has been seen, taking the RSI back above 30. Such moves have tended to be a trigger for decisive recovery.
However, there is some considerable resistance to recovery. Closing above 0.6000 would be the first step. However, the overhead supply of the old May/June key lows between 0.5983/0.6048 will be housing plenty of willing sellers. This is the big resistance to overcome.
Furthermore, there is a one-month downtrend also coming around 0.6060. Again, this needs to be broken. However, if this RBNZ move does change the perception of the NZD, this resistance will be a good test. Breaking above it would be confirmation that the market has indeed shifted its opinion. A rally to test 0.6120/30 and above could then be seen.
