MUFG’s call puts the risk squarely on the New Zealand dollar: with a hike almost fully priced, the currency’s G10 outperformance this month depends on the RBNZ endorsing a much steeper path than MUFG expects. Neutral or “wait and see” language could trigger a repricing of the roughly three and a half further hikes priced, pulling front-end yields lower and weighing on the kiwi, with AUD/NZD a likely beneficiary ahead of the RBA meeting on November 2 and 3. A hawkish surprise would delay that repricing, not prevent it, in MUFG’s view. Oil remains the main counterweight: further gains in crude would push up New Zealand’s fuel-driven inflation and make the market’s more aggressive path harder to unwind.
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Earlier:
- All 5 major NZ banks expect RBNZ to hike to 3% today, but split on how far rates will go
- Preview: RBNZ set to lift OCR to 3% ahead of election as oil and weak kiwi fuel inflation
- NZIER Shadow Board majority backs 25bp RBNZ hike to 3% as oil and weaker kiwi bite
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MUFG thinks the RBNZ will hike today and then disappoint, arguing that New Zealand’s spare capacity cannot justify the rate path markets have priced, which leaves the kiwi’s recent strength on borrowed time.
Summary:
- MUFG expects the RBNZ to raise the OCR 25bp to 3% at 01:00 GMT (21:00 US Eastern on Tuesday), with the hike almost fully priced.
- It sees only one further hike, to a peak of 3.25%, while markets price around three and a half more hikes after today.
- MUFG says slightly weaker Q3 inflation reflects spare capacity, and unemployment rose to 5.6% in Q2, the highest since Q3 2015.
- The New Zealand dollar is the third-best performing G10 currency this month, which MUFG says needs a hawkish hike and strong guidance to continue.
- MUFG sees risks skewed to the downside for the NZ dollar and expects it to underperform over its forecast horizon.
MUFG expects the Reserve Bank of New Zealand to raise its official cash rate by 25 basis points today but to fall short of the hawkish path markets have priced, leaving the New Zealand dollar exposed to downside risk, according to a preview from the bank.
The decision is due at 01:00 GMT on Wednesday, which is 21:00 US Eastern on Tuesday. MUFG said the rates market is almost fully priced for a 25 basis point hike, which would take the OCR to 3% and mark a third consecutive increase. The bank expects the RBNZ to deliver that move, but sees only one further hike after today, to a peak of 3.25%. By MUFG’s reckoning, market pricing implies around three and a half additional hikes beyond today’s decision, with three hikes in total priced by March.
The gap matters for the currency. MUFG noted that the New Zealand dollar has been the third-best performing G10 currency this month, a run it said depends on the RBNZ delivering a hawkish hike and guidance strong enough to validate current pricing. Without that, the support from rate expectations could fade.
MUFG’s case for a shallower path rests on the domestic economy. It said third-quarter inflation came in slightly weaker than expected, which it believes reflects the degree of spare capacity, or unused resources, in the New Zealand economy. The bank also pointed to the jump in the unemployment rate to 5.6% in the second quarter, the highest since the third quarter of 2015. In MUFG’s view, that slack means the economy will not require as much tightening as markets are pricing.
The bank said the risks for the New Zealand dollar are skewed to the downside. Even if the RBNZ delivers a hawkish hike today, MUFG expects investors to question at some point how many increases are priced, and it forecasts the currency to underperform over its forecast horizon.
MUFG’s view puts it at the dovish end of expectations. Locally, ANZ has pencilled in a pause in December, while ASB and Westpac expect the OCR to reach 3.5% by February. With today’s meeting a Monetary Policy Review without updated forecasts or a rate track, the tone of the RBNZ’s statement is likely to decide which of those paths markets lean toward.
This article was written by Eamonn Sheridan at investinglive.com.