FX Flash – RBNZ to turn hawkish?

by: Roy Teo

  • NZD gains after stronger than expected CPI in Q1
  • RBNZ likely to stay cautious; NZD to remain firm
  • CAD: Worst performing G10 currency this week


FX-Flash-RBNZ-to-turn-hawkish-20-Apr-17.pdf (76 KB)

NZD gains after stronger than expected CPI in Q1

The New Zealand dollar (NZD) surged by 40 pips to 0.7040 this morning after data from Statistics New Zealand showed that inflation in the first quarter of this year rose from 1.3% to 2%yoy, highest reading since the third quarter of 2011. Tradable inflation rose 1.6% supported by higher food prices and a slower yoy pace of gains in the exchange rate. Non-tradable inflation rose 2.5%yoy as transport and house price inflation firmed. In addition, the NZD trade weighted index is weaker than what the RBNZ had forecast earlier this year in February. As a result, financial markets have increased the odds (32%) that the RBNZ will raise the Official Cash Rate by the end of this year.


RBNZ likely to stay cautious; NZD to remain firm

We acknowledge that recent developments have challenged our view that the RBNZ is likely to only tighten monetary policy early next year. However in the next monetary policy meeting on 11 May, we expect the RBNZ to highlight that the subdued labour market and wage growth as a reflection of spare capacity in the economy. In addition, there are some encouraging signs that house price inflation has probably peaked and hence the spill over effects on non-tradable inflation will slow. Nevertheless, we expect the NZD to be supported as overcrowded net short speculative positions are unwound given an improving inflation and terms of trade outlook.


CAD: Worst performing G10 currency this week

The Canadian dollar (CAD) is the worst performing G10 currency since the start of this week. Lower crude oil prices and dairy trade dispute between the US and Canada weighed on the CAD. Australia and New Zealand dairy industry leaders have also said that they would support moves by the US to draw the World Trade Organizaton into a trade dispute with Canada. Separately the Ontario government has announced that they will unveil a package of measures later today to cool the real estate market, which will include new tax on foreign property speculators. The Toronto province is also considering a 15% tax on property purchases by foreign buyers. Overall we expect monetary policy and crude oil prices to remain the main drivers for the CAD. In 2015, the value of Canadian exports of dairy products was around CAD 211m compared to total export value of CAD 525bn. Hence the dairy trade dispute is unlikely to materially impact the Bank of Canada’s economic and inflation outlook. On the exchange rate, against the US dollar we expect the CAD to find strong support closer to 1.36 region.