22 Jul 2015
RBNZ scenarios: 25bp cut, dovish bias favoured - Westpac
FXStreet (Bali) - Imre Speizer, FX Strategist at Westpac, expects the RBNZ to cut the OCR by 25bp at Thursday's RBNZ OCR Review, adding that the NZ Central Bank is also likely to communicate further easing ahead, thus anticipating the NZD to fall slightly in response.
Key Quotes
The consensus among economists is for a 25bp cut, a recent WSJ poll showing 15 out of 16 institutions expecting -25bp and one expecting -50bp. We explore four possible scenarios and predict the market reactions:
(a) very dovish from the market’s viewpoint (30% chance) - a 50bp cut. There are valid arguments for a 50bp cut (detailed in this worthwhile read: “How low will it go? RBNZ OCR Preview”) such that the choice between 50bp and 25bp from the RBNZ’s point of view may simply be tactical. In response to a 50bp cut, the 2yr swap rate would fall 24bp and NZD/USD would fall around 2 cents.
(b) slightly dovish (45%) - a 25bp cut, accompanied by strong forward guidance (such as: “It is likely that significant further reductions in the OCR will be required in the months ahead.”). Such forward guidance would be enough for markets to maintain pricing around current levels. The 2yr swap would fall by 6bp and NZD/USD would fall 0.5 cents.
(c) slightly hawkish (24%) - a 25bp cut, accompanied by weak forward guidance (such as: “We expect further easing may be appropriate. This will depend on the emerging data.”).The 2yr swap would rise by 7bp in disappointment, while NZD/USD would rise by 1 cent. The NZD’s reaction in this case would be larger because speculative positioning is extremely short.
(d) very hawkish (1%) - on hold, accompanied by weak guidance. This scenario has around a zero chance, in our opinion, but we include it for completeness to illustrate the potential maximum upward response. A major surprise, it would push the 2yr swap 30bp higher and NZD/USD 3 cents higher.
Key Quotes
The consensus among economists is for a 25bp cut, a recent WSJ poll showing 15 out of 16 institutions expecting -25bp and one expecting -50bp. We explore four possible scenarios and predict the market reactions:
(a) very dovish from the market’s viewpoint (30% chance) - a 50bp cut. There are valid arguments for a 50bp cut (detailed in this worthwhile read: “How low will it go? RBNZ OCR Preview”) such that the choice between 50bp and 25bp from the RBNZ’s point of view may simply be tactical. In response to a 50bp cut, the 2yr swap rate would fall 24bp and NZD/USD would fall around 2 cents.
(b) slightly dovish (45%) - a 25bp cut, accompanied by strong forward guidance (such as: “It is likely that significant further reductions in the OCR will be required in the months ahead.”). Such forward guidance would be enough for markets to maintain pricing around current levels. The 2yr swap would fall by 6bp and NZD/USD would fall 0.5 cents.
(c) slightly hawkish (24%) - a 25bp cut, accompanied by weak forward guidance (such as: “We expect further easing may be appropriate. This will depend on the emerging data.”).The 2yr swap would rise by 7bp in disappointment, while NZD/USD would rise by 1 cent. The NZD’s reaction in this case would be larger because speculative positioning is extremely short.
(d) very hawkish (1%) - on hold, accompanied by weak guidance. This scenario has around a zero chance, in our opinion, but we include it for completeness to illustrate the potential maximum upward response. A major surprise, it would push the 2yr swap 30bp higher and NZD/USD 3 cents higher.