Dovish Narrative from RBNZ Triggers NZD Selloff

Overnight, the Reserve Bank of New Zealand (RBNZ) held its Official Cash Rate (OCR) unchanged at 5.50% for an eighth consecutive meeting, which was widely expected by markets and economists. What did surprise at today’s meeting, however, was the central bank’s shift to a more dovish stance, indicating that a rate reduction may be closer than previously anticipated.

You may recall that May’s central bank meeting surprised markets and echoed a hawkish tone. This, in turn, delivered strong upside across the board for the New Zealand dollar (NZD). The RBNZ were expected to lower their forecasts, particularly for inflation and the OCR, yet the opposite materialised: an increase in both inflation and OCR forecasts. Additionally, at the previous meeting, RBNZ Governor Adrian Orr emphasised this at the press conference, where there was a ‘real consideration’ among policymakers regarding possibly increasing the OCR.

Nevertheless, although today’s Summary Record of the Meeting stated that the ‘Committee agreed that monetary policy will need to remain restrictive’, the addition of the following sentence: ‘The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures’ was a crucial point and represents a deviation from May’s hawkish vibe.

Adding to the dovish narrative in today’s release, you may also note that the Summary Record communicated that ‘restrictive monetary policy has significantly reduced consumer price inflation’, though, in May’s statement, it stated that ‘restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation’. The Summary Record also largely repeated that headline inflation is expected to reach the RBNZ’s inflation target range of between 1.0% and 3.0% in the second half of this year.

Rate Cut This Year?

Several desks believe that the dovish shift is unlikely sufficient to trigger a rate reduction at August’s policy meeting despite the central bank having more data to work with at that point. The only tier-1 data the central bank had before today’s rate decision was GDP growth numbers, which revealed New Zealand’s economy had exited from another technical recession after growth rose +0.2% in Q1 this year, which was in line with the central bank’s forecasts.

Ahead of the next policy meeting in August, the central bank will have additional data to assess, such as quarterly CPI inflation and job numbers. Therefore, while a rate cut in August is still questionable – the sizeable dovish repricing in rate expectations shows investors are currently pricing in a 57% chance of a rate cut – this meeting may provide a platform for the central bank to voice its case for a rate reduction in the latter half of the year. September’s meeting is now fully priced for a 25-basis point cut (-33 basis points).

NZD Hammered Lower on Dovish Shift

Following the announcement, the NZD experienced a sizeable depreciation versus all its G10 peers. There was a notable move to the upside in the AUD/NZD cross in the first hour following the release, adding +0.8% and reaching a high of NZ$1.1092 (testing levels not seen since late 2022). The NZD/USD dropped -0.8% in the first hour to a low of $0.6075, with the major currency pair now trading flat on the month.

The downside move in NZD/USD completed a head and shoulders top pattern (head at $0.6154) after rupturing the pattern’s neckline, drawn from the low of $0.6098. As seen from the H4 chart below, technical studies show the pair still demonstrates scope for further downside towards the pattern’s profit objective at $0.6067, closely shadowed by another layer of support between $0.6052 and $0.6062.

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