MUFG sees RBNZ hiking to 3% today but under-delivering on pricing, flags NZD downside
MUFG's recent analysis highlights the risks surrounding the New Zealand dollar (NZD) in light of the Reserve Bank of New Zealand's (RBNZ) interest rate decision. They anticipate an increase to 3.00%, yet they caution that the RBNZ's subsequent guidance may lack the hawkish tone currently priced in by the market. Per the full note , with the market expecting about three and a half hikes beyond today, any neutral language could instigate a downward reassessment of NZD, making way for gains in AUD/NZD as a potential beneficiary. Furthermore, continued crude oil price rises pose challenges for the RBNZ's rate outlook, potentially complicating their future decisions as inflation pressures persist.
What the desk is arguing
The desk views MUFG's skepticism towards the RBNZ's commitment to a more aggressive rate hike path as a pivotal point for NZD traders. Given that a hike to 3% is almost entirely priced in, any indication of a less aggressive stance could catalyze a sharp repositioning away from the kiwi. MUFG highlights that New Zealand's labor market, with rising unemployment at 5.6%, suggests less urgency for subsequent hikes, a theme echoed in their expectation of only one additional hike to a peak of 3.25%.
Data released in Q3 indicates a softening inflation slide, with current market pricing expecting around 175 basis points of tightening in total beyond the expected hike, highlighting potential misalignment between current expectations and fundamental economic data. This positioning creates a ripe environment for trading strategies focused on NZD downside, with AUD/NZD likely to be a focal point as traders look ahead to the RBA meeting next month.
Where it sits in our coverage
Our consensus target for AUD/NZD stands at 1.075, with a range spanning from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk’s perspective aligns closely with MUFG but sits slightly more hawkish than the wider consensus, particularly given bofa's more bearish forecast.
How other firms see it
Firms such as jpmorgan reflect a similar cautious outlook on the NZD's trajectory, anticipating similar weakness if RBNZ's language does not support heightened expectations. Conversely, bofa remains firmly on the opposite side, expecting more significant downside for NZD based on their analysis of economic fundamentals.
Observing the AUD/NZD pair will be critical as the performance indicators from the RBNZ's guidance unfold, especially considering how oil prices interplay with New Zealand's inflation calculations and broader economic outlook.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01MUFG anticipates a 25bp hike to 3% but believes the RBNZ will under-deliver on future rate hikes.
- 02Expectations of a hawkish stance are crucial for the NZD's continued strength against G10 currencies.
- 03Rising unemployment and weak Q3 inflation challenge the viability of further aggressive rate increases.
- 04Potential NZD downside would favor AUD/NZD positioning ahead of the RBA meeting.
Market implications
Traders should watch for any language inconsistencies from the RBNZ that might prompt a recalibration in NZD expectations. If the RBNZ adopts a wait-and-see approach, AUD/NZD could see levels push above 1.10 as short positions on NZD gain traction.
Risks to this view
The primary risk to this outlook lies in a significantly hawkish surprise from the RBNZ today that exceeds market expectations, which could bolster NZD performance and deflate AUD/NZD. Additionally, stronger-than-anticipated inflation reports from New Zealand could also lead to a reassessment of the RBNZ's rate path.
MUFG’s call puts the risk squarely on the New Zealand dollar: with a hike almost fully priced, the currency’s G10 outperformance this month depends on the RBNZ endorsing a much steeper path than MUFG expects. Neutral or “wait and see” language could trigger a repricing of the roughly three and a half further hikes priced, pulling front-end yields lower and weighing on the kiwi, with AUD/NZD a likely beneficiary ahead of the RBA meeting on November 2 and 3. A hawkish surprise would delay that repricing, not prevent it, in MUFG’s view.
Oil remains the main counterweight: further gains in crude would push up New Zealand’s fuel-driven inflation and make the market’s more aggressive path harder to unwind. --- Earlier: All 5 major NZ banks expect RBNZ to hike to 3% today, but split on how far rates will go Preview: RBNZ set to lift OCR to 3% ahead of election as oil and weak kiwi fuel inflation NZIER Shadow Board majority backs 25bp RBNZ hike to 3% as oil and weaker kiwi bite --- MUFG thinks the RBNZ will hike today and then disappoint, arguing that New Zealand’s spare capacity cannot justify the rate path markets have priced, which leaves the kiwi’s recent strength on borrowed time. Summary: MUFG expects the RBNZ to raise the OCR 25bp to 3% at 01:00 GMT (21:00 US Eastern on Tuesday), with the hike almost fully priced. It sees only one further hike, to a peak of 3.25%, while markets price around three and a half more hikes after today.
MUFG says slightly weaker Q3 inflation reflects spare capacity, and unemployment rose to 5.6% in Q2, the highest since Q3 2015. The New Zealand dollar is the third-best performing G10 currency this month, which MUFG says needs a hawkish hike and strong guidance to continue. MUFG sees risks skewed to the downside for the NZ dollar and expects it to underperform over its forecast horizon.
MUFG expects the Reserve Bank of New Zealand to raise its official cash rate by 25 basis points today but to fall short of the hawkish path markets have priced, leaving the New Zealand dollar exposed to downside risk, according to a preview from the bank. The decision is due at 01:00 GMT on Wednesday, which is 21:00 US Eastern on Tuesday. MUFG said the rates market is almost fully priced for a 25 basis point hike, which would take the OCR to 3% and mark a third consecutive increase.
The bank expects the RBNZ to deliver that move, but sees only one further hike after today, to a peak of 3.25%. By MUFG’s reckoning, market pricing implies around three and a half additional hikes beyond today’s decision, with three hikes in total priced by March. The gap matters for the currency.
MUFG noted that the New Zealand dollar has been the third-best performing G10 currency this month, a run it said depends on the RBNZ delivering a hawkish hike and guidance strong enough to validate current pricing. Without that, the support from rate expectations could fade. MUFG’s case for a shallower path rests on the domestic economy.
It said third-quarter inflation came in slightly weaker than expected, which it believes reflects the degree of spare capacity, or unused resources, in the New Zealand economy. The bank also pointed to the jump in the unemployment rate to 5.6% in the second quarter, the highest since the third quarter of 2015. In MUFG’s view, that slack means the economy will not require as much tightening as markets are pricing.
The bank said the risks for the New Zealand dollar are skewed to the downside. Even if the RBNZ delivers a hawkish hike today, MUFG expects investors to question at some point how many increases are priced, and it forecasts the currency to underperform over its forecast horizon. MUFG’s view puts it at the dovish end of expectations.
Locally, ANZ has pencilled in a pause in December, while ASB and Westpac expect the OCR to reach 3.5% by February. With today’s meeting a Monetary Policy Review without updated forecasts or a rate track, the tone of the RBNZ’s statement is likely to decide which of those paths markets lean toward. This article was written by Eamonn Sheridan at investinglive.com.
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