All and sundry expected the RBNZ to hike its cash rate to 3.0% today and it didn’t disappoint. The focus, instead, was on how the RBNZ would convey the message that it was uncomfortable with the strength of the NZD while ensuring that fixed interest rates did not dip. The potential for getting this wrong was high but Governor Wheeler has handled the messaging with aplomb, resulting in only modest financial market re-pricing. (The NZD TWI is up 30 basis points and fixed interest markets rallied a couple of points).
…We, too, are strong believers that the NZD should soon start to fall and that the catalyst should be the recognition that declining dairy auction prices will eventually feed into the terms of trade. The terms of trade decline will happen at the same time that US tightening talk increases, NZ GDP growth peaks and election uncertainty rises. It is no coincidence that the RBNZ, in today’s statement, highlights the fact that “auction prices for dairy products have fallen by 20% in recent months”
…For now, we will stick with our call that the RBNZ hikes in both June and July. At the time of writing, the market is pricing in an 85% chance of a hike in June and 34 basis points of hikes, cumulatively, over June and July. Given the currency risks that abound this is probably a fair reflection of where things should stand.
BNZ