RBNZ preview: Timeline for taming inflation key for New Zealand dollar reaction

• RBNZ highly likely to keep New Zealand cash rate at 5.5% in May
• OCR forecast track, final paragraph of statement to drive NZD movements
• Three months ago, RBNZ forecast rate cuts would likely start by June 2025. Markets expect the RBNZ to cut rates by November.
• NZD/USD and NZD/JPY look heavy 24 hours out from the rate decision
• Rate decision arrives 2pm Wellington time on Wednesday. Press conference starts at 3pm

RBNZ provided platform to shake things up

The Reserve Bank of New Zealand (RBNZ) is likely to leave its overnight cash rate at 5.5% on Wednesday. However, with updated economic forecasts, along with a press conference from Governor Adrian Orr, the bank has been provided plenty of clear air to shake these sleepy FX markets up, if it chooses to do so.

OCR track to dictate initial NZD moves

When it comes to trading the New Zealand dollar around the event, you’ll need to become familiar with the RBNZ OCR track. Released four times a year, it's simply the bank’s forecasts for the cash rate, taking what is conveyed in its policy statement and applying it to the rate outlook. If you’re looking for what will move the NZD immediately after the decision is released, this will be it.

If you don’t have access to a live markets newsfeed, the OCR track can be found in the RBNZ’s monetary policy statement under the title ‘Monetary policy outlook’.

Prior track had hike risks factored in

Relative to the track offered last November which retained 19 basis points of hikes by September with the first full reduction not expected by September 2025, the forecast track issued in February was far less hawkish with only 10 basis points of hikes priced in by September with a rate cut favoured by June 2025. Lower with faster easing, essentially.

Source: RBNZ

The question for this update will be what changes, if any, there’ll be to the track? Looking at the key forecasts offered by the RBNZ in February, it’s obvious that without the stickiness of inflation seen in the first three months of the year, the bank would likely have signalled or started cutting rates already given weakness in economic activity.

The economy is recession and labour market conditions are softening faster than anticipated. Without the sharp drop in labour force participation in Q1, unemployment would have been well above forecast. Soft survey data has also deteriorated, pointing to a continuation of these trends.

But inflation remains too high for comfort, even with business leaders continuing to see it returning towards the midpoint of the RBNZ 1-3% target over the next two years. The interpretation of how much work is left to be done to bring demand and supply back into equilibrium will determine what the RBNZ will signal.

Updated track may show no hike risk, earlier start for cuts

With persistent weakness in activity reinforcing policy settings are not only restrictive bur very restrictive right now, the RBNZ can do away with signalling the risk that rates may need to lift again. With other central banks such as the ECB and BoE guiding towards cutting rates midyear without sparking meaningful currency weakness, the RBNZ may feel confident enough to bring forward the timing of its first cut to Q1 2025, especially with markets and private forecasters looking for the first move to arrive either later this year or in early 2025.

Testing sustainability of sustained higher rates

Aside from the forecast track, the final paragraph of the monetary policy press release is highly important for markets, providing commentary on the outlook for interest rates.

When the RBNZ last met in April, it stated: “Economic growth in New Zealand remains weak. While some near-term price pressures remain, the Committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3 percent target range this calendar year.”

While there could be any multitude of changes, the removal of word sustained in the final sentence could be something to look out for.

Markets, economists look for first cut by Q4 2024

Less than 24 hours out from the decision, New Zealand overnight index swaps (OIS) markets put the probability of a 25 basis point rate cut by November at 84%. By February 2025, 43 basis points of easing is priced, or nearly two cuts. By May next year, 87 basis points of cuts are expected. As for economic forecasters, 24 of 30 polled by Reuters see the RBNZ cutting rates in the final quarter of the year.

NZD/USD fatigued after solid rebound

NZD/USD looks heavy on the four hourly chart, putting in a double-top last week before drifting lower ahead of the RBNZ decision. Support at .6100 looks like it may soon give way, pointing to a retest of the uptrend Kiwi has been in since the start of May. Momentum indicators such as RSI and MACD have broken down, adding to the sense of near-term downside risks.

While NZD/USD did some work around .6080 in April, .6050, the intersection of horizontal and uptrend support, looks a more meaningful level. Below, the 200-day moving average at .6037, .5980 and .5920 are the levels to watch. On the topside, .6140 proved tough to crack last week, making that the first level of note. .6184 and double-top at .6217 are the next after that.

NZD/JPY upside momentum weakening

Looking at NZD/JPY, the strong uptrend from the start of May looks like it may soon come under threat. Struggling to overcome resistance from 95.58, momentum is turning lower. RSI has diverged from price while MACD has crossed over from above, signalling building downside risks. Should the uptrend give way, downside levels to watch include 94.85, 94.20, 93.93 and 93.50. On the topside, there is little resistance evident until you get to 97.81, the high struck in the leadup to the GFC.

-- Written by David Scutt

Follow David on Twitter @scutty