Unemployment fell to 4% YoY in Q1 down from 4.6% YoY in Q2 – which equates to a staggering -12.4% drop over the quarter. Employment growth was also strong across all sectors which, so the report is in line with fewer benefit recipients and a rise in jobs advertisements. And this is just the latest of a strong set of data points for New Zealand, which helps explain why RBNZ are likely to be the most hawkish central bank among major economies.
Economic data for New Zealand is booming
If we compare the economies among FX majors, NZ likely comes out on top. The New Zealand CESI (Citi Economic Surprise Index) shows that data continues to outperform expectations and sits just off its 6-month high. Furthermore, the CISI (City Inflation Surprise Index) for NZ has now shot up to its highest level in 15-months, and most recently helped by inflation rising at its fast rates in over a decade in Q2. Back in July the ZIEW business confidence index rose sharply and expanded for its first time since Q3 2017.
What does this mean for interest rates?
Shortly after today’s employment report, ANZ Bank revised their forecast for RBNZ to raise rates to 1% by the end of the year. As rates are currently 0.25% and there are just four meetings left in the year, that could mean three of the four meetings may be ‘live’, assuming three hikes of +25 bps. However, RBNZ are not known to pull any punches and have a history of getting ahead of the curve. And we saw this last year when they unexpectedly cur rates by -75 bps in their March 2020 meeting.
So, will they raise by +75 bps? We think that would be a stretch, given they have only just stopped their QE programme. But it certainly leaves the potential for at least one hike at their August meeting, or a strongly worded forward guidance for hikes at their September, October or December meeting.
What are the best plays for NZD traders?
Trading currencies is all about pairing the strong against the weak. As the most dovish major central bank is the ECB one could assume hedge funds may look to short EUR/NZD over the coming weeks.
Yet the Fed is also dovish as long as they do not begin to taper. And should the Fed maintain the inflation is transitory (and allow inflation to get hot) then NZD/USD longs could also be of interest. In fact, NZD/USD broke above 70.0 and it’s 200-day eMA following today’s employment report.
Should markets maintain a ‘risk-on’ attitude then carry trades tend to perform well. A carry trade is simply where large funds buy currencies with higher (or expectations of higher rates) against currencies with lower interest rates, such as CHF and JPY (note that both witzerland and Japan have negative yields). Therefore, NZD/CHF and NZD/JPY should perform well as long as risk-sentiment remains positive and traders expect RBNZ to raise rates.
But a pair to consider over the near-term is GBP/NZD as the Bank of England hold their monetary policy tomorrow. As mentioned in our report, we expect the BOE to raise their economic forecasts and strike a cautiously optimistic tone. But, what if they don’t? Then that could weigh on GBP and provide downside pressure on GBP/NZD over the near-term. However, if BOE are more hawkish than expected tomorrow that could make shorts less appealing. But as RBNZ will still be the more hawkish central bank then GBP/NZD could still see further downside once the BOE meeting is out of the way.