NZDUSD has been shedding some of its recent gains over the last couple of weeks as risk sentiment has cooled off. This mostly has to do with external factors.
While news from New Zealand has been positive on the COVID front, the rise in cases in other parts of the world has made investors nervous.
After all the rate cuts during the pandemic, the difference in real rates between New Zealand and the US has returned to stability. In previous cycles of QE, investors found NZD a haven in their search for yields.
But not this time around, with near-zero rates. The question now is how long this will continue.
The Monetary Situation
Many analysts expect that the current RBNZ policy won’t be enough to jump-start the now open economy, and more easing will be required.
There is special emphasis on the deterioration in the housing market, which is suffering due to a lack of foreign investment, as travel is still restricted to the islands.
There is an expectation that Governor Orr will be downbeat and cautious during the press conference following the decision, in line with most central banks.
We still don’t have June data, and the idea is that the RBNZ will wait until there is more solid information on how the recovery is evolving before changing policy.
Speaking of Policy Changes…
The two options under debate are:
1. Negative rates
Orr has hinted at negative rates in the past. However, there is pretty strong opposition to them by the shadow board. A recent survey conducted by Reuters found that most financial institutions widely rejected them.
2. Increasing asset purchases
This is, by far, the favored option. At the last meeting, they nearly doubled the size of what’s known as the LSAP to NZD60B.
There is a strong consensus that no major changes in policy are expected this time around. The focus is on the tone of the press conference later in the day.
Of the surveyed economists, only one expects a rate cut at the next meeting. But the number jumps to around a third of economists expecting a negative rate within the next year.
Markets have priced in the consensus, with the expectation of a pessimistic press conference.
In the unlikely case that Orr shows optimism about the economic recovery, then the NZD could get some extra support since that would catch pretty much all market makers by surprise.
Otherwise, we expect the event to not influence the trajectory of the NZD in the immediate term.