RBNZ Hike May do Little for NZD

NZD/USD Weekly Fundamental Forecast: Bearish

• NZD/USD remains dependent on the USD despite leading up to another official cash rate hike
• NZD weighed down by proximity to China as US-China tensions flare up

NZD/USD Rises on Softer USD Despite – Remains USD Dependent

The recent NZD/USD bullish move has more to do with a softer dollar than kiwi strength. Fundamentally, NZD relies on commodity prices and the general state of the global economy but more importantly, China. The recent decline in commodity/agriculture prices has attributed to the longer-term decline in the kiwi dollar. Furthermore, the planned period of demand destruction by major central banks has resulted in a lower level of aggregate demand as corporations and consumers tighten their belts during this time of exceptionally high inflation.

NZD/USD Daily Chart Rising up to Resistance Ahead of RBNZ Rate Hike

Source: TradingView, prepared by Richard Snow

The bearish bias of this piece stems from the directional dependence on the US dollar instead of the NZD (despite the fact we are days away from the RBNZ meeting); and a general easing in commodity prices. Furthermore, the kiwi dollar may be weighed down by its proximity to China as US-China tensions drag on.

Markets currently expect another 50–basis point hike on Wednesday which will result in the official cash rate rising to 3%.

Market Implied Probabilities of the RBNZ rate hike:

Source: Refinitiv

RBNZ with Plenty Leeway to Hike on Wednesday

The RBNZ – like many major central banks – seeks to uphold its mandate of creating full employment and maintaining purchasing power. Currently, the New Zealand job market is extremely tight boasting an unemployment figure of 3.2%. Central bankers often look at this figure (rightly or wrongly) when assessing how aggressive to hike and the fact that unemployment remains tight allows central bankers to remain aggressive.

Source: Refinitiv, prepared by Richard Snow

Looking at CPI, the latest data print sees this at 7.3%, much higher than the 2% target – providing further urgency to continue hiking rates at the same cadence.

New Zealand CPI Data Since 1 January 2020

Source: Refinitiv, prepared by Richard Snow

Risk Events for the Week Ahead

Next week there is a lot of GDP and Inflation data scheduled for a number of major economies but New Zealand and US specific data is rather light. On Wednesday we see the Reserve Bank of New Zealand press conference as well as U S retail sales for July and finally we have the FOMC minutes.

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX