RBNZ reviewed: kiwi back to 0.7250? - Westpac

Analysts at Westpac expplaind that the RBNZ’s Monetary Policy Statement (MPS) this morning reduced the OCR by 25bp to 1.75%, as was widely expected, and shifted from an easing bias to a neutral one. The market response was moderately hawkish.

Key Quotes:

"The key policy guidance paragraph stated: “Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that policy settings, including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly..”.

This suggests a period of policy stability ahead, and is certainly less dovish than the 22 September OCR Review which read: “Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range. We will continue to watch closely the emerging economic data..”

The new OCR projection shows the OCR settling at 1.7%, which is consistent with the guidance language. A 1.7% rate could be anything between 1.65% and 1.74%, implying only a small chance of further easing. Interestingly, the RBNZ shows its OCR projection back in August was also at 1.7%.

The NZD exchange rate narrative was similar to September’s: “The exchange rate remains higher than is sustainable for balanced economic growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.”.

The fx market interpreted the statement hawkishly, NZD/USD rising from 0.7295 to 0.7359. However given the US election result impact the pair may struggle beyond 0.7400 on the day. AUD/NZD fell from 1.0490 to 1.0401 but should find support at 1.0365.

NZD/USD thus rose from 0.7205 to 0.7341 (but back at 0.7285 as we write) – a surprisingly large response given the outcome was in line with priced expectations. We would expect the NZD to settle around 0.7250 once the initial froth has subsided.  AUD/NZD fell from 1.0680 to 1.0550, but should find support around 1.0500.

2yr swap rates rose 3bp from 2.27% to 2.30%, and could rise further towards 2.35% during the week ahead, if markets continue to price in some chance of tightening in 2017 (not our view). The 10yr rose from 3.09% to 3.10%, and from here will be influenced more by the US election reaction than the RBNZ."