October 5, 2021 14:32:57

The RBNZ is set to be the second major central bank to hike rates in this pandemic-recovery cycle. The market is pricing in over an 80% chance of a 25bp rate rise at its meeting overnight. The surprise hold in August coincided with a national lockdown, but it is the forward guidance that will be the key focus.

Domestic demand has shown signs of resilience in the face of Delta headwinds. Since the last bank meeting, the economy was running much hotter than forecast, with GDP rising a huge 2.8% in the June quarter. Even when restrictions were at their most limiting, there was a solid 0.7% increase in the number of filed jobs. Cost pressures also continue to grow with inflation above target at 3.3% and a tight labour market.

The risks of a more cautious RBNZ are possible given the ongoing impact of the Delta strain, but demand does tend to rebound once restrictions are lifted. On the flip side, the market had been leaning towards the possibility of a 50bp move during the summer. But Assistant Governor Hawkesby has signalled a more measured approach recently. This may see a slightly slower pace of tightening than previously forecast with smaller steps to policy normalisation.

NZD/USD retraces back to Fib level

The kiwi suffered a setback over the past few weeks on depressed risk sentiment and crowded long positioning. While the zero Covid policy is being questioned, the race is now on to vaccinate a large part of the population.

The dip in NZD didn’t make new cycle lows beyond the trough in August at 0.6805. Instead, we’re on four straight days of gains from the end of September lows around 0.6859. This move has rebounded back to the 23.6% Fib level of the February to August move at 0.6958. The 50-day SMA sits just above 0.70 with the next Fib level (38.2%) at 0.7055. Any RBNZ caution may push prices back towards cycle lows south of 0.69.