NZD/USD: RBNZ delivers hawkish surprise, Kiwi gains capped by amplified economic risks

RBNZ is intent on defeating inflation even if it means sacrificing the economy
It sees a greater chance than not of another rate hike this year. Cuts are not expected until late 2025
Cash rate left at 5.5%, although a hike was strongly considered
NZD/USD surges 1% to two-month highs above .6150

The Reserve Bank of New Zealand (RBNZ) is intent on defeating inflation even if it means sacrificing the economy, delivering a major surprise at its latest monetary policy meeting by flagging the likelihood that rates may need to increase again with a later starting date for cuts. The Zealand dollar surged on the unexpected hawkish pivot.

RBNZ delivers hawkish surprise

As expected, the RBNZ kept the cash rate unchanged at 5.5% in May. However, that was about the only thing that didn’t surprise with the bank delivering a slew of hawkish changes, whether it be its updated forecasts or commentary.

The biggest shift came from its overnight cash rate track with its profile pointing to 15 basis points of hikes by December, implying a greater risk than not that rates will increase to 5.75% before the end of 2024. Three months ago, it had only seven basis points of hikes forecast over the year.

Source: Antipodean Macro

The bank also sees a later starting point for reducing the cash rate from its present level, pushing back the expected timing by three months to September 2025. It also increased its estimate for the neutral policy setting, lifting it by 25 basis points relative to three months earlier. That implies it sees rates needing to remain higher than in the past to reduce inflationary pressures.

With rates expected to remain unchanged or higher in the coming year, its forecasts for unemployment were increased a touch. However, it’s inflation forecasts was bumped higher following the uncomfortably high March quarter report. A return to the top of its 1-3% target is not expected until September.

Domestic inflation too hot to consider cuts

In the monetary policy statement, the RBNZ acknowledged it considered hiking rates in May, pointing to an expectation that it will take time for domestic inflationary pressures to subside.

“While weaker capacity pressures and an easing labour market are reducing domestic inflation, this decline is tempered by sectors of the economy that are less sensitive to interest rates,” it said. “These near-term factors include, for example, higher dwelling rents, insurance costs, council rates, and other domestic services price inflation. A slow decline in domestic inflation poses a risk to inflation expectations.”

In term of forward guidance, it said policy needs to “remain restrictive to ensure inflation returns to target within a reasonable timeframe”, again pointing to stickiness in domestic price pressures.

RBNZ November rate cut probability plunges

Prior to its May meeting, markets saw a greater than 80% chance that rates would be cut by November. Following today’s meeting, that’s now deemed a line-ball call. New Zealand two-year swaps surged 13 basis points following the update. That’s important as it’s what most fixed rate mortgages are priced off.

Source: Refinitiv

NZD/USD surges but will it last?

With the RBNZ far more hawkish than almost anyone expected, the New Zealand dollar took off like a rocket as soon as the hot headlines hit, sending NZD/USD to fresh multi-month highs above .6150. Zooming out, NZD/USD sits in a clear uptrend, adding to gains after clearing the 50 and 200-day moving averages earlier this month. With indicators such as RSI and MACD remaining bullish, the NZD/USD remains a buy on dips prospect for now.

However, with the RBNZ intent on defeating inflation at the expense of the economy, traders should be on the lookout for a potential break of the uptrend given amplified downside risks to the New Zealand economy. Interest rate differentials are one thing but hammering economic activity unnecessarily may not go down well globally.

Support is located at .6083 with resistance kicking in at the session high above .6150 and again at .6218.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.