Weekly Forex & Interest Rate Outlook

We expect the NZD to rally following the RBNZ’s MPS on Thursday.

Markets have sold the NZD during the past month, partly because they expect the RBNZ will revise its interest rate forecast significantly lower. Admittedly, some of the recent data has been disappointing, notably milk powder prices, inflation and labour data. However less attention appears to have been paid to the strong migration data, as well as the fiscal impulse from the 2014 Budget. Accordingly, we expect the RBNZ interest rate track will only be revised modestly lower, certainly not to the extent of the 65bp gap (at the three year ahead point) between the March MPS forecast and current market pricing. If the RBNZ fails to endorse market pricing, as we expect, then NZD/USD should rise towards 0.8600 this week.