FX Comment – RBNZ to resume monetary tightening in 2015 H1

by: Roy Teo

RBNZ to resume hiking rates in 2015 H1

According to NZIER Q3 business survey, net optimists have fallen for the third consecutive quarter to 19% in September 2014 (compared to 53% in last quarter of 2013). Nevertheless, according to NZIER this is consistent with economic growth at above trend rate of 2.8% in the second half of this year. Inflation is also expected to rise from 1.6% in the second quarter to 2.5% in early 2015, the middle band of RBNZ 2-3% inflation target. As such we expect the RBNZ to resume its monetary tightening cycle in early 2015 with the OCR rising from current 3.50% to 4.25% by the end of next year. This should help cushion the NZD against the USD given that the market is significantly under estimating the pace of Fed rate hikes next year (Dec 15 Fed funds futures imply 0.72% vs FOMC 1.38% and ABN 1.5% projections). Furthermore, speculative futures positions are no longer overcrowded with long positions close to neutral levels and at two standard deviations below the past 10 year average. Our 2014 and 2015 NZD/USD forecasts are 0.77 and 0.73 respectively.