RBNZ Meeting Preview - Kiwi ready for lift-off?
Note: this video was recorded yesterday before New Zealand announced the 3-day snap lockdown.
At their last meeting, they halted their NZ$100 bln QE program and removed forward guidance to be patient when normalizing rates. It's just been announced that there will be a 3-day snap lockdown in New Zealand after a single covid case was discovered. The money market (OIS) has now adjusted lower the likelihood of a hike at this meeting to 76%. If they do hike by 25bps, they’ll be the first major central bank in G10 to begin increasing interest rates (quite ironic given they were guiding for negative interest rates not too long ago). With macro-prudential policy such as the tightening of lending standards being implemented to try and cool the red hot property market, there is a chance we see no hike whatsoever. Given that a 25bps hike is priced at 76%, a reaction in FX markets would come from no hike, a 25bps hike (as market does have some doubt if we'll see it) or updated rate path guidance which indicates more or less hikes than currently priced in the OIS curve (55bps by end of H1 2022). Modest Kiwi strength would come from a 25bps hike or more hawkish rate guidance than currently priced by the market. Weakness would arise if the RBNZ didn't hike rates at all or forward guidance on interest rates was below current market pricing.
In contrast, the RBNZ’s Antipodean cousin the RBA are still guiding for rates to remain on hold until 2024, but they did throw a bit of a hawkish curveball at the market when they decided not to reverse their tapering of QE purchases in September from A$5 bln to A$4 bln. However, minutes out overnight showed that some members on the RBA had considered delaying the taper of asset purchases. This has hit AUD circa 50bps. Employment stats from Australia will drop on Thursday, which should provide some insights into the effects of lockdowns across Sydney and Melbourne. A brief discussion around commodities is always warranted when discussing the Aussie’s prospects. Iron ore, Australia’s largest commodity export has been struggling, but this has partially been offset by positive price moves in their second largest export – coal.
I’m bullish on the NZD as a result of recent robust economic data as well as having the most hawkish central bank out there. However, there are some risks to my bullish outlook. The NZD has a steep money market curve which could reprice violently lower if delta flares up in New Zealand given the low vaccination rate (which we are seeing now). The bullish consensus means unwind risks are present. The risks to a short trade idea on AUDNZD are - positioning is significantly net short for AUD and slightly net long for NZD as well as rates bottoming for AUD (monitoring virus situation) and potentially peaking for NZD. Let’s take a look at the charts now for potential tradeable opportunities.
NZDUSD is a touch off its range support (0.695) and hovering right around its 21-day EMA and 50-day SMA. Upside moves from here will have quite a few different forms of resistance to contend with – the trendline, 200-day SMA and the RSI close to 60 which marked previous price rallies. Speaking of the RSI it’s making a series of higher lows and there was some negative divergence with price lows helping stem selling pressure around 0.695. It’s not the best thing that a death cross has happened. My upside target would be around 0.71 (200-day SMA and prior horizontal support). On the downside, I’d look back to the range support around 0.695.
The divergent central bank theme is playing out nicely on the charts. Price finally sliced through its range support at 1.06 and now is fluctuating around the mid-104s. The RSI moved out of oversold and made higher lows while price made lower lows (divergence). The death cross adds to the evidence for taking a short the rallies approach. In terms of price targets, on the upside the 21-day EMA would capture my interest with 1.055 and 1.06 my next levels to watch. On the downside, the 1 December low of 1.041 would need to be taken out first and then from there the Head and Shoulders pattern target of 1.025 would come into play.