At their last meeting, RBNZ announced they would halt their LSAP programme (Large Scale Asset Purchase, or QE). GDP is surging, inflation beat expectations in Q2, with CPI rising at its fastest pace in 10 years. Inflation expectations are also rising, and a decent employment report has all but confirmed that RBNZ are on the path to hike rates tomorrow.
Economists and money markets agree on a cash rate hike
A majority of economics polled by Reuters expect a +25 bps hike tomorrow, which would take it from a record low of 0.25% to 0.5%. They also expect the cash rate to be at 1% by Q4 this year, and 1.5% by Q4 2022. Money markets also agree with hike tomorrow, as the 1-month OIS (overnight index swap) trading at 0.5213. However, as the 6-month OIS is trading at 0.73 it suggests another 25 bps hike is not expected this year, so there’s a discrepancy between economists and money market pricing.
A single hike may not be enough for a bullish reaction
However, as traders we want surprises. Therefore, a hike tomorrow may not produce a bullish reaction for NZD pairs as traders are expecting just that. Yet if RBNZ are to not raise rates it could well send NZD pairs lower as bulls close out their positions. Alternatively, if RBNZ hike and hint that there may be more hikes to follow then it’s possible we could see a bullish reaction form NZD pairs.
To instil a volatile reaction tomorrow, we would likely need to see one of the following scenarios:
- RBNZ hike by +50 bps: As this is not currently forecasted, it would be a pleasant surprise to the bull camp (and even more so if EBNZ also hint at further hikes). This situation is not impossible either, given they slashed rates ‘unexpectedly’ by -50bps at the height of the pandemic.
- RBNZ hike by +25 bps and hint at further hikes: Whilst this scenario may not be as bullish as the first one, it should still support NZD pairs.
- RBNZ hold rates: This would likely catch pre-emptive NZD bulls off guard, causing them to close out and send NZD lower. We also think this scenario is unlikely, but that’s no reason to not prepare for it.
China data disappoints
A set of underwhelming data points weighed on risk appetite during yesterday’s Asian session. Whilst retail sales rose 8.5% YoY in July, it was below expectations of 11.5% and beneath June’s 12.1% print. Industrial output was another miss, rising only 6.4% compared to the 7.8% expected and down from 8.3% previously. Fixed asset investment also mise the mark, rising 10.3% compared with 11.3% forecasted.
A rise in new COVID-19 cases and floods across mainland China are taking the blame and adds to the case that growth is expected to slow. Yet this means that PBOC’s policy is expected to remain accommodative, which then helped the CSI300 index outperform Asian markets yesterday and rise nearly 2% yesterday, before giving back early gains to close -0.1% lower for the day. The China A50 index (CN50) was effectively flat at -0.01% by the end of the day.
US consumers lack confidence, does the Fed care?
A surprise drop in consumer confidence weighed on the US dollar on Friday, when the University of Michigan Consumer Sentiment Index fell to a 10-year low of 70.2 from 80.8. The -10.6 point drop is its largest month on month fall since the pandemic began and is a -2 standard deviation move, which has only occurred three times over the past 10 years.
Given the magnitude of the move, one must wonder whether this will make the Fed delay their plan to taper. We have up until now maintained the view that the Fed were more likely to reveal their tapering plans at the Jackson Hole symposium in a couple of weeks and begin tapering their QE program in September of October. But it is now plausible that, even if they reveal a tapering plan at Jackson Hole, they may hold off until next year. The US dollar index (USX) fell over -0.5% on Friday to a 5-day low during its most bearish session in two-months. This allowed EUR/USD to break above 1.1755 and confirm our countertrend bounce from the March lows and reach our initial 1.1800 target outlined last week.