RBNZ next up to walk the central bank tightrope NZDUSD

At the baseline, key Monetary Policy settings are expected to remain unchanged. The Overnight Cash Rate (OCR) will be left at 0.25%. The Large Scale Asset Purchase program (LSAP) cap is likely to remain at $100bn and the Funding for Lending Program(FLP) will remain in place.

Of more interest will be how the RBNZ manages the high wire balancing act performed so adeptly by the RBA earlier this month, by acknowledging the improvement in the economy since the last MPS in November including;

The unemployment rate falling back below 5% earlier this month.
GDP and inflation metrics have been better than anticipated.
Upside momentum in the housing market has prompted the reintroduction of LVR restrictions to limit financial stability risks.

While providing sufficient dovish forward guidance to placate an interest rate market that has begun to price in interest rate hikes, ahead of the expiry of the RBNZ’s current forward guidance (the RBNZ committed to leaving the OCR at 0.25% for at least 12 months when it cut in March 2020).

If the RBNZ follows the lead of the RBA, their statement will likely strike a tone that acknowledges the improved outlook, but highlights that downside risks remain to an economy still a long way from employment and inflation objectives. Made worse by an appreciating exchange rate that brings us neatly around to what lies ahead for the NZD/USD.

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Providing the NZD/USD can consolidate over the next 24 hours, its overnight break above the January .7315 high, it should allow a test of the next upside level at .7400c, with scope to .7500c.

To participate in this up move we favour using a corrective pullback, ideally towards support .7275/55ish to enter NZDUSD longs. Aware that should the NZD/USD break below .7250/30ish, it would be the first indication the short-term upside has stalled and that a deeper correction is underway.

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