Back
10 Dec 2014
RBNZ reinforces its explicit tightening bias - Westpac
FXStreet (Bali) - The RBNZ’s Monetary Policy Statement this morning kept the OCR unchanged at 3.50% as expected, but reinforced its explicit tightening bias – a hawkish surprise to the markets, notes Imre Speizer, FX Strategist at Westpac.
Key Quotes
The RBNZ’s Monetary Policy Statement this morning kept the OCR unchanged at 3.50% as expected, but reinforced its explicit tightening bias – a hawkish surprise to the markets.
The most important change, from the market’s point of view, was a reinsertion of the explicit tightening bias into the one-page press release: “Some further increase in the OCR is expected to be required at a later stage.” This explicit bias was removed from the press release in October. The market was looking for a further watering down of the implicit bias.
As expected, the RBNZ downgraded the interest rate forecast. Compared to the September forecast, it is now 36bp lower at the Dec 2016 point. However, since the market was already priced 60bp lower, this shift was market neutral.
The previous warning about the high NZD exchange rate was repeated: “The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.”
Market reactions to the MPS were mixed. NZD/USD jumped from 0.7690 to 0.7822, probably reflecting market positioning. However, given interest rates have hardly moved, we expect the upside to be limited. AUD/NZD fell from 1.0780 to 1.0620 where it should find some support.
Interest rate markets decoupled from the currency, probably an expression of scepticism. The NZ 2yr swap rate actually fell 0.5bp from 3.815% to 3.810%. We expect it to continue to price out tightening, and thus gravitate to OCR + premium = 3.70% during the months ahead. The next major technical level of yield support is 3.75%.
The 2-10yr swap curve was little changed from 45bp and should remain so.
Key Quotes
The RBNZ’s Monetary Policy Statement this morning kept the OCR unchanged at 3.50% as expected, but reinforced its explicit tightening bias – a hawkish surprise to the markets.
The most important change, from the market’s point of view, was a reinsertion of the explicit tightening bias into the one-page press release: “Some further increase in the OCR is expected to be required at a later stage.” This explicit bias was removed from the press release in October. The market was looking for a further watering down of the implicit bias.
As expected, the RBNZ downgraded the interest rate forecast. Compared to the September forecast, it is now 36bp lower at the Dec 2016 point. However, since the market was already priced 60bp lower, this shift was market neutral.
The previous warning about the high NZD exchange rate was repeated: “The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.”
Market reactions to the MPS were mixed. NZD/USD jumped from 0.7690 to 0.7822, probably reflecting market positioning. However, given interest rates have hardly moved, we expect the upside to be limited. AUD/NZD fell from 1.0780 to 1.0620 where it should find some support.
Interest rate markets decoupled from the currency, probably an expression of scepticism. The NZ 2yr swap rate actually fell 0.5bp from 3.815% to 3.810%. We expect it to continue to price out tightening, and thus gravitate to OCR + premium = 3.70% during the months ahead. The next major technical level of yield support is 3.75%.
The 2-10yr swap curve was little changed from 45bp and should remain so.