NZD/USD has just fallen short of setting new cycle highs this Tuesday, coming within a few pips of Monday’s high at 0.7343. The currency has held up well despite a choppy and broadly firmer US dollar, with NZD/USD finding decent support around the 0.7310 mark during the European morning/early US session. At present, the pair trades with modest gains of about 0.2% or close to 15 pips on the day.
NZD/USD did not see much by way of volatility in wake of Fed Chair Jerome Powell’s semi-annual testimony to Congress on Tuesday; the Fed Chair delivered little by way of new information and opted not to be drawn in to comment on recent US bond yields moves, not giving traders much to go off (though some may see his refrain as giving yields the green light to continue ramping up).
But his typically dovish tone does seem to have given market some reassurance and the fact that US stocks, which had sold off deeply at one point, are now back to roughly flat on the day (the S&P 500 is anyway), has helped to lift NZD/USD from lows. US data played second fiddle to the above-mentioned themes, but for the record, Conference Board’s February Consumer Confidence survey was better than expected, though the headline number remains well below pre-pandemic levels (and is likely to stay that way until vaccines defeat the pandemic) and Case Shiller House Price data showed an acceleration in house price growth.
NZD traders are likely to stay on the sidelines and thus trade is likely to remain subdued ahead of the RBNZ monetary policy decision at 01:00GMT and press conference at 02:00GMT (preview below).
Looking ahead, the main event of Wednesday’s Asia Pacific session as far as NZD traders are concerned will be the RBNZ’s monetary policy decision at 01:00GMT and subsequent press conference with RBNZ Governor Adrian Orr at 02:00GMT. The bank is not expected to adjust the OCR (its key interest rate, which currently resides at 0.25%) or the size of the LSAP (Large Scale Asset Purchases) programme, which currently allows the bank to buy up to NZD 100B in assets (namely, New Zealand government bonds).
Last year, expectations were that by March 2021, the RBNZ would have taken interest rates into negative territory. However, improvements in the global economic outlook driven by vaccine optimism, combined with better-than-expected macro-economic data in New Zealand and the fact that New Zealand has managed to largely avoid any meaningful Covid-19 outbreaks has seen markets price out the prospect of negative rates.
Meanwhile, the fact that the bank recently acted to curb mortgage lending by increasing loan-to-value (LVR) restrictions shows the bank is clearly concerned about an overheating housing market (something which negative rates would make even worse), thus supporting the case for no further rate cuts. Money markets now price no further easing measures in 2021 and a number of analysts now forecast that the RBNZ will be one of the first developed market central banks to cut rates this economic cycle.
All-in-all then, though the RBNZ are likely to try not to sound too optimistic no the economic outlook given they will want to avoid handing too much of a boost to NZD, the bank is likely to present a more positive outlook on the prospects for the economy going forward.
In the press conference, RBNZ Governor Adrian Orr might be asked about the recent ramp-up in New Zealand government bonds; the 10-year yield is up more than 30bps in the last seven trading sessions. This will give the governor an opportunity to jawbone yields lower (likely hurting NZD) if he chooses.