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Will the Reserve Bank of New Zealand put a cash rate hike on its agenda at the next meeting? Meanwhile, the regulator may stand pat on rates contrary to market expectations. Let’s discuss this topic and make up a trading plan for NZDUSD and AUDNZD.
Monthly New Zealand dollar fundamental forecast
Investors are attributing the NZDUSD rally to the change in RBNZ rhetoric at the May 22 meeting. They believe that the cooling of inflation is not aligning with the RBNZ’s expectations, which could potentially lead to a cash rate hike. The futures market is currently pricing in a 42bp rate cut in 2024, and any shift in the central bank’s views could trigger a rally in the kiwi. However, this may not be the case.
Australia and New Zealand have a lot in common. Their primary trading partner is China. Both countries are commodity exporters. The continuing flow of migrants makes their labor markets strong. Both the aussie and kiwi are lucrative currencies that rise in times of improving global risk appetite. This is precisely what is happening in the late spring. The NZDUSD gained 4.2% from its April lows, and the AUDUSD added 4.7%. The Australian and New Zealand dollars are the best-performing G10 currencies in the second quarter as carry traders shift to them to make profits on the difference against the US dollar.
Notably, Australia has been tightening its monetary policy at a slower pace compared to New Zealand. Currently, Australia’s cash rate stands at 4.35%, while New Zealand’s is 5.5%. These differences are reflected in the economies of the two countries. For instance, New Zealand’s economy experienced a recession in the second half of the year, and business activity also declined in January-April. These factors contributed to a decrease in annual inflation expectations from 3.22% to 2.73% and two-year inflation expectations from 2.5% to 2.33%.
New Zealand Inflation Expectations
Source: Bloomberg.
Under these circumstances, the RBNZ is expected to focus on easing monetary policy in the near future, which, according to Westpac and ANZ Bank New Zealand, is not expected until 2025. In their opinion, the central bank will not decide to lower the cash rate without inflation figures for the second and third quarters. The banks forecast the growth of NZDUSD quotes up to 0.62 by the end of June against the Fed’s hints on monetary expansion.
This logic makes sense, as the kiwi has some trumps up its sleeve. It receives special attention as a commodity currency thanks to the rise in the commodity index to its highest level since April 2023. It is benefiting as a risk asset from the surge in US equity indices to record highs. Even accelerating capital outflows in China are playing into the hands of NZDUSD bulls. Investors understand that to stop this process, the PBoC will have to stabilize the yuan.
Foreign currency sales by Chinese banks
Source: Bloomberg.
Monthly NZDUSD и AUDNZD trading plan
The bottom line is that the Reserve Bank of New Zealand is unlikely to signal further monetary tightening at its May 22 meeting, triggering a NZDUSD sell-off on facts after buying the pair on rumors. At the same time, Australia’s regulator will likely keep the cash rate unchanged for longer than New Zealand after the slower rate hikes in the tightening cycle. In this connection, long trades on AUDNZD can be considered with the targets of 1.105 and 1.12.
Price chart of NZDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
