RBNZ: 25bps cut is fully priced - BNZ

Kymberly Martin, Senior Market Strategist at BNZ, suggests that all eyes are on tomorrow morning’s RBNZ meeting and we would be surprised if its actions have any enduring impact on the NZD.

Key Quotes

“Relative economic fundamentals, global risk appetite and evolving expectations for the US Fed will likely remain dominant drivers.

However, the market has come a long way in recent weeks to price almost 70bps of further OCR cuts. The risks around this meeting are therefore likely tilted toward the RBNZ not sounding sufficiently dovish relative to these expectations. The NZD/USD could gain a knee-jerk skip higher. The risk on the other side would be the RBNZ delivering a 50bps cut tomorrow. While not out of the question, we think this unlikely.

Heading into Thursday’s meeting of the RBNZ the market has increased its pricing of potential OCR cuts. It now prices a trough in the OCR at 1.57% within the year ahead. It also prices 27bps of rate cuts this week. i.e. a 25bps cut is fully priced and the market is assigning a small chance to a 50bps cut.

Our core view remains for 25bps cuts at the RBNZ’s meetings this week, in September and in November. This would take the OCR to a trough of 1.50%.Consistent with this view we see NZ 2-year swap trading toward 1.80% in the months ahead. Yesterday 2-year swap closed at 1.96%. NZ 10-year swap closed down 2bps, at 2.47%.”