RBA Recap: Overnight, the RBA stood pat on its outlook for monetary policy with the plan to taper asset purchases in September. This had been somewhat of a surprise to market consensus given the recent lockdown measures, which in turn prompted a lift in AUD/USD. However, the decision by the RBA had been the scenario that I had leaned towards given the following reasons.
- RBA expects the economy to bounce back quickly once the virus is contained and restrictions are eased, based on prior evidence.
- RBA’s framework also takes into account decisions by other central banks. Both BoE and BoC tapered asset purchases at a time where their respective countries were under restrictive measures.
NZ Employment Key Ahead of RBNZ Decision
Elsewhere, the next focus for antipodeans will be the NZ employment report, which will be key ahead of the RBNZ rate decision later this month and essentially confirm whether or not a hike will take place. As it stands, money markets are pricing in a 77% probability of a 25bps hike at the upcoming meeting. Although, while front end rates have seen a sizeable shift in the past month, the Kiwi has failed to take advantage of the move in rates with NZD/USD continuing to hover around the 0.7000 handle. On the flipside, however, a miss in tonight’s employment will likely lead to a more 50/50 rate hike call for the August meeting and thus prompt a slight pick up in AUD/NZD to 1.0600.
Four NZ Rate Hikes Priced in By End of 2022
1M Change in FX vs Change in OIS
China Concerns Leave NZD Vulnerable
That being said, while the domestic fundamentals have been encouraging for New Zealand there are pockets of uncertainty across China, which could keep upside in the Kiwi capped. Particularly as China begin to reimpose restrictive measures given the recent pick up in Covid cases. In turn, with front end rates priced very hawkishly, this does leave the Kiwi vulnerable to an unwind in hawkish bets should China concerns rise.
NZD/USD Chart: Daily Time Frame