New Zealand Dollar Rally May Stall as RBNZ Disappoints on Rates

The interest rate announcement tops the data docket, with economists calling for the Reserve Bank of New Zealand to hold rates at the record-low 2.5%. The markets seem to be in agreement, with a Credit Suisse index of priced-in expectations showing traders see no chance of a hike this time around. To that effect, all eyes will be focused on the statement accompanying the release, with investors looking to gauge whether the timetable for the withdrawal of monetary stimulus has been accelerated from the previously given “latter part of 2010” estimate after consumer prices unexpectedly surged in the third quarter.

The hawks may be in for a disappointment however considering policymakers will be wary of acting on rates to protect the still very fragile export sector. Indeed, both the central bank and government have been very vocal about the detrimental effects of a higher Kiwi dollar in driving away foreign demand. Overseas sales make up over 30% of the economy’s total output, so any policies that stand to hurt firms catering to foreign markets will likely stunt the fledgling economic recovery of recent months. Appropriately enough, September’s Trade Balance figures are set to be released less than two hours after the central bank announcement crosses the wires, with exports expected to match the 23-year record drop recorded in the previous month even as the overall deficit narrows on lackluster import demand.

In fact, the RBNZ may have already embarked on a somewhat covert tightening campaign aimed at checking inflationary pressure while minimizing the impact on the NZD exchange rate. The central bank “leaked” an announcement that it would end some of its emergency lending programs enacted amid the credit crunch in November, a fact that it did not officially confirm via an official news release until about a day later. This move will gradually slow the flow of liquidity into the economy, reducing the pace of money supply growth and acting against inflation. Policymakers’ approach to the announcement suggests they were consciously trying to avoid a snow-ball effect that would send the New Zealand Dollar steeply higher. It also hints that perhaps this approach to tightening will be seen as sufficient to stick with rates at current levels until the second half of next year as scheduled.

Looking beyond the economic calendar, the outlook for risk sentiment is likely to remain a key catalyst for price action. Indeed, a trade weighted average of the New Zealand Dollar’s value remains over 95% correlated with the MSCI World Stock Index as traders’ appetite for returns boosts stocks, commodities and high-yielding currencies alike. To that effect, traders will keep a keen eye on a handful of high profile third-quarter earnings reports including those from consumer goods giant Procter & Gamble, big oil names including Exxon Mobil and Chevron, and US Steel.