RBNZ Rate Decision Preview: Fireworks For NZD/USD?

Today’s RBNZ monetary policy statement will be the main focus for NZD traders. Given that the central bank is unanimously expected to maintain the cash rate at 0.25%, the primary focus will be on the accompanying statement and economic projections, in which the latter is likely to be upgraded. What’s more, with option implied vols over the 90th percentile in NZD/USD and AUD/NZD, we could be in for a decent-sized reaction.

NZD IMPLIED MOVE

RBNZ Rate Decision Preview: Fireworks for NZD/USD?

Source: Refinitiv, DailyFX

NZ Economy: Since the last MPS (Feb), the NZ economy has been much more resilient than the RBNZ had expected.

  1. Q1 unemployment rate dropped to 4.7%. Reminder, the RBNZ assumed a jump to 5.2% in 2021 and does not see 4.6% until the end of the forecast period.
  2. Q1 CPI topped forecasts at 1.5% (exp. 1.4%), however, fell short of the central bank’s assumptions. That said, inflation expectations (2.05%) now sit at the RBNZ’s midpoint.
  3. Strong retail sales for Q1 at 2.5% raises upside risks to the Q1 GDP data.

With that in mind, economic forecasts are likely to be upgraded, which could see the timing of a rate hike brought forward (keep an eye on the OCR forecast). Should this take place, the NZD would likely see an initial lift, however, the RBNZ will remain cautious in their rhetoric, emphasizing that policy needs to remain very accommodative.

NZD Positioning: Heading into the meeting, markets appear to be leaning for a more hawkish outcome. This would have been boosted by the RBNZ’s shadow board who sees a strong case for tightening over the coming year. Alongside this, with both fast money (leveraged funds) and real money (asset managers) long NZD, the asymmetric trade would be for a hawkish disappointment relative to expectations. In this scenario, NZD/USD would be vulnerable to a drop below 0.7150. However, should the RBNZ provide an upbeat assessment, expect 0.7250 to be the target for bulls. That said, I remain optimistic on the NZD vs AUD and would look to fade any AUD/NZD rallies.

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