9 Jun 2015
3 reasons why RBNZ wont' cut this week - Westpac
FXStreet (Bali) - Imre Speizer, FX Strategist at Westpac, walks us through three reasons why a cut at this week’s MPS by the RBNZ is unlikely.
Key Quotes
"There are three reasons we consider a cut at this week’s MPS unlikely. First, the conditions the RBNZ set for easing have not all been met – domestic demand notably remains firm."
"Second, the RBNZ has always explicitly signalled changes in advance (emergencies excepted); there has been no such signal yet."
"Finally, the inflation outlook hasn’t changed much since April, thanks to a falling exchange rate."
We explore four possible scenarios and predict the market reactions:
(a) very dovish from the market’s viewpoint - a 25bp OCR cut. For the reasons outlined above we assign a low 10% probability to this outcome. The 2yr swap rate should fall 22bp and NZD/USD should fall around 2 cents in response.
(b) slightly dovish (35%) - no cut, the 90d track around 50bp lower, and imminent cuts signalled via language such as: “Providing wage and price setting behaviour remains subdued, we expect to reduce the OCR later in the year.”. Markets would immediately price in a full 50bp cycle, and possibly more. The 2yr swap would fall by 6bp and NZD/USD should fall 1/2 cent, although we note speculators are extremely short NZD/USD such that a 1/2 cent bounce is just as likely.
(c) slightly hawkish (50%) - no cut, track possibly slightly lower at the far end, and the conditional easing bias retained. However the preamble would be signioficantly more dovish than in April, citing falling business confidence and housing market controls. The 2yr swap would rise by 4bp in disappointment, while NZD/USD could rise by 1 cent.
(d) very hawkish (5%) - no cut, unchanged track, unchanged policy language. This would be a major surprise, pushing the 2yr 17bp higfher and NZD/USD 2 cents higher.
Key Quotes
"There are three reasons we consider a cut at this week’s MPS unlikely. First, the conditions the RBNZ set for easing have not all been met – domestic demand notably remains firm."
"Second, the RBNZ has always explicitly signalled changes in advance (emergencies excepted); there has been no such signal yet."
"Finally, the inflation outlook hasn’t changed much since April, thanks to a falling exchange rate."
We explore four possible scenarios and predict the market reactions:
(a) very dovish from the market’s viewpoint - a 25bp OCR cut. For the reasons outlined above we assign a low 10% probability to this outcome. The 2yr swap rate should fall 22bp and NZD/USD should fall around 2 cents in response.
(b) slightly dovish (35%) - no cut, the 90d track around 50bp lower, and imminent cuts signalled via language such as: “Providing wage and price setting behaviour remains subdued, we expect to reduce the OCR later in the year.”. Markets would immediately price in a full 50bp cycle, and possibly more. The 2yr swap would fall by 6bp and NZD/USD should fall 1/2 cent, although we note speculators are extremely short NZD/USD such that a 1/2 cent bounce is just as likely.
(c) slightly hawkish (50%) - no cut, track possibly slightly lower at the far end, and the conditional easing bias retained. However the preamble would be signioficantly more dovish than in April, citing falling business confidence and housing market controls. The 2yr swap would rise by 4bp in disappointment, while NZD/USD could rise by 1 cent.
(d) very hawkish (5%) - no cut, unchanged track, unchanged policy language. This would be a major surprise, pushing the 2yr 17bp higfher and NZD/USD 2 cents higher.