What to expect from RBNZ tomorrow?

The Reserve Bank of New Zealand is scheduled to announce its next monetary policy decision during the upcoming Asia-Pacific session (Wednesday, 1:00 am GMT). Market consensus is for interest rates to be left unchanged. However, a spike in NZD implied volatility, suggests that traders are not ruling out a possibility of a surprise.

What to know ahead of RBNZ meeting?

Expectations for tomorrow's RBNZ decision are for rates to be kept unchanged, with the Official Cash Rate staying unchanged at 5.50%. Such an outcome is expected by 14 out of 15 economists surveyed by Bloomberg. One economist (from TD Bank) expects a 25 basis point rate hike to 5.75%. When it comes to money markets, swaps suggest a 21% chance of RBNZ delivering a 25 bp rate hike and 79% of the Bank keeping rates unchanged.

The most likely scenario is RBNZ keeping rates unchanged while leaving a hawkish bias in the statement. While New Zealand's CPI inflation slowed from 5.6% YoY in Q3 2023 to 4.7% YoY in Q4 2023, it still remains significantly above the target. Unless RBNZ has more confidence that inflation is sustainably dropping towards the target, it may keep mention of potential rate hikes in the statement. Interestingly, while major central banks seem to be readying for the first rate cuts, money markets do not price a full 25 basis point cut before the turn of 2024 and 2025.

A point to note is that  Q1 household inflation expectations survey showed big jumps in 2- and 5-year inflation expectations, raising the risk that expectations may not be anchored. If RBNZ has more data suggesting that expectations are de-anchoring, it may opt for a rate hike at tomorrow's meeting.

Money markets price in 21% chance of RBNZ hike tomorrow and 79% chance of rates being kept unchanged. Source: Bloomberg Finance LP

Options markets price in volatility spike

However, the situation on the options market deserves a note. NZDUSD options saw its implied overnight volatility spike to almost 19%, the level not seen since mid-July 2023. Back then, the spike also occurred a day before the RBNZ meeting, during which the Bank left interest rates unchanged for the first time in 12 meetings. Interestingly, July decision to hold rates unchanged was in-line with expectations of all economists surveyed by Bloomberg, with NZDUSD gaining around 0.25% within an hour following the announcement.

A spike in the options implied volatility suggests that demand for options, and thus protection from abrupt market moves, is on the rise. This means that investors are increasingly cautious going into the meeting and do not rule out a possibility of a surprise from RBNZ. 

Source: Bloomberg Finance LP

A look at NZDUSD chart

Taking a look at NZDUSD chart at D1 interval, we can see that the pair has recently broken above the upper limit of the short-term trading range. Pair climbed to the highest level since mid-January 2024, but failed to reach 0.6250 area - a textbook target of the upside breakout from trading range. This week saw a pullback on NZDUSD marked with the pair now testing the 0.6150 support zone, marked with the upper limit of an earlier-broken trading range as well as 50-session moving average. 

A hawkish surprise from RBNZ tomorrow, like for example unexpected rate hike or a very hawkish statement, would likely see NZDUSD spike, with the aforementioned 0.6250 area being the first potential targets for buyers. On the other hand, a dovish surprise, like for example keeping rates unchanged and removing reference to potential further hikes from the statement, could see the price slumped below 0.6150 support and move towards 200-session moving average, which currently runs in the 0.6062 area.

A point to note is that recent local highs on NZDUSD have been painted when RSI indicator was above 70.0. This was not the case this time suggesting that ongoing pullback may be a correction and that the peak of the current impulse is yet to be reached.

Source: xStation5