RBNZ send the Kiwi soaring

The RBNZ went full hawk at the latest meeting, catching the market off guard.

No changes to current policy, but the forward guidance was exceptionally hawkish.

Towards the end of last year, they were still talking about negative rates. Those days are gone, and all reference to a negative cash rate has been dropped from the minutes.

Snippets via Westpac

The re-introduced OCR track showed a full rate hike by Q3 2022 (which markets had already priced) and a total of 150bp of hikes by mid-2024 (above market pricing).

Comparing the April statement (emphasis mine)

“The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained at the 2 percent per annum target midpoint, and that employment is at or above its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.

The Committee agreed that it was prepared to lower the OCR if required.”

With today's forward guidance

“The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. 

Meeting these requirements will necessitate considerable time and patience”.

Key differences

  • CPI: 'at' becomes 'near'

  • Employment: 'at or above' becomes 'at'

The NZD was not mentioned at all (i.e. no concerns regarding currency strength),

In response to today’s announcement

  • Pricing for August 2022 OIS rose 16bp from 0.50% to 0.66%

  • Jun-22 bank bill futures yield rose from 0.45% to 0.58%

  • 2yr swap rate rose from 0.52% to 0.59%

  • 10yr swap rates rose from 1.89% to 1.96%

  • 2031 NZGB yield rose from 1.76% to 1.86%.

  • In currency markets, NZD/USD rose from 0.7230 to 0.7294, and AUD/NZD fell from 1.0725 to 1.0662.

  • We see potential for these reactions to extend

Kiwibank: We have pulled forward our forecast OCR hikes to commence from May ’22 (prev. Nov ’22). There is significant upside risk to Kiwi interest rates and the Kiwi dollar. We are wary of mortgage related fixing in coming days, weeks, and months.

 Big repricing in front-end New Zealand curve following RBNZ's new rate forecasts.

One whole HIKE added by end of 2022!

-- Which central banks gonna follow?— Stephen Spratt (@StephenSpratt) May 26, 2021 

It seems that everyone is jumping aboard the hike train, with the RBNZ joining the BoC at the Hawkiest end of the curve.

Latest RBA forecasts look for no hikes until 2024...

Surely they can't maintain that outlook and stay 2 years behind the projected rate hike curve of their peers?

Especially when wage pressures are in the pipeline 👇

Gareth Aird, head of Australian Economics at Commonwealth Bank of Australia, reckons the governor might be a little too pessimistic (on the 2024 timeline)

“If you’re trying to achieve higher wages and higher inflation, what you need is things like capacity utilization at elevated levels, you need lots of skills shortages so that you’ve got a better chance of wages coming through,” he said. “Everything looks like it’s moving in the right direction on that front.”

CBA’s profile for inflation and wages “is running ahead of what the RBA is saying,” adding that “the forward-looking indicators of labor demand are as strong as we’ve seen them in a long, long time.”

Whilst I have concerns regarding the AUD over the medium term as China grapples with deleveraging, the next RBA meeting (June 1st), just got a lot more interesting and the Aussie likely has further upside in the near term.

Note: Something to keep an eye on in China 👇

Heavy rains last year decimated crops and concerns over the Three Gorges Dam were widespread.

If the dam breaks, all bets are off, and the devastation would be enormous. Low odds of it happening though...

Food is the far more important issue. Hungry people aren't obedient citizens, and China has to import a lot of food to keep those bellies full, especially after weather affected crops and swine flu in recent years...

China's economic momentum is easing according to a Bloomberg aggregate index

Confidence among small and medium-sized enterprises, or SMEs, eased in May from the highest level since the Covid-19 outbreak in the previous month, according to a survey of more than 500 companies by Standard Chartered Plc.

The index measuring current performance weakened in the month, while a drop in the ‘expectations’ sub-index points to concerns on future demand and profit margins.

“Surging raw-material prices appears to have become the key challenge for SMEs,” according to Standard Chartered’s economists Lan Shen and Ding Shuang.

“Domestically-focused SMEs seem more vulnerable to rising input costs, while export-oriented SMEs’ profit margins remained intact on strong new orders and elevated output prices.”

The recent idea of Yuan strength as a specific policy target 'to offset rising commodity prices' doesn't make sense to me.

PBoC set the latest fixing at 6.4099 and the offshore Yuan continued to strengthen into the 6.38 handle.

Mixed messages from state media aren't helping.

Bloomberg: The China Securities Journal quoted analysts on Wednesday as saying that the currency could rise further due to the nation’s economic recovery and capital inflows. The Shanghai Securities News reported that the yuan could rally to as high as 6.2, citing Citic Securities Co., the country’s biggest brokerage.

Reuters: An appreciation in China’s yuan might not be a good way to deal with rises in commodity prices, the state-owned Economic Information Daily said in a front-page commentary on Wednesday.Many market participants told Reuters they took the commentary in the paper, which is owned by the official Xinhua news agency, as a signal of China’s official stance towards recent discussion over the yuan and surges in factory-gate prices in the mainland.

China shouldn’t focus on a continued yuan appreciation to reduce the cost of imports and price levels, Wang Jinbin, a professor at Renmin University of China, wrote in the commentary, headlined “RMB appreciation may not be a good way to deal with commodity price rises”.

Wang added that it was not appropriate to use key monetary policy tools to cope with structural increases in import prices.

“From a policy perspective, yuan exchange rate policy is acting as an important monetary policy tool. Structural increases in commodity prices in global financial markets do not mean significant inflationary pressures will occur globally,” he said.

The key quote:

Wang said rapid rises in the yuan could hurt the country’s exporters, which play an important role in China’s dual-circulation strategy to prop up economic growth.

If you are running a trade surplus (as China are) excessive currency strength is undesirable.

And it looks as if they are reining in the commodity prices anyway...

Sticking with currencies and trade surpluses, ECB's Panetta was as dovish as ever...

 ECB’s Panetta:

‘Financing conditions are tightening’

‘Further undesirable increase in yields’

‘Non-negligible move in the euro’

👇🏼👇🏼👇🏼 https://t.co/UrNtZzyvno— 📈 Transitory Tim 📉 (@VolaTim) May 26, 2021 

Are we approaching peak optimism? 👇👇👇

@MichaelaArouet

AvidCommentator

U.S home buying intentions experienced their largest ever monthly drop since records began over 50 years ago.

Home buying intentions now sit at their lowest level since 2012.

Some concerning signs for the long term sustainability of the U.S housing boom.

U.S consumer confidence is now being entirely held up by "current conditions" (aka $2.8tn in "stimmyz" in 6 months)

Broader confidence is stagnating & expectations have rolled over.

The low income jobs recovery is going backwards & consumer spending intentions are plummeting.

Absolutely nothing of interest on the calendar today...

EUR/USD: 1.2195-1.2200 (652M), 1.2205-15 (500M), 1.2220-30 (619M), 1.2250 (307M), 1.2275 (297M)

USD/CHF: 0.9000 (200M)

EUR/CHF: 1.1000 (740M)

EUR/GBP: 0.8600-15 (1.1BLN)

GBP/USD: 1.4150 (351M), 1.4220 (427M)

USD/SEK: 8.2650 (826M)

AUD/USD: 0.7740-50 (1.2BLN), 0.7770-85 (1.1BLN), 0.7820 (268M)

NZD/USD: 0.7215 (598M), 0.7300 (205M)

USD/JPY: 108.00 (1.1BLN), 108.25 (410M), 108.50-60 (611M), 108.80 (604M), 108.95-109.00 (410M), 109.25 (725M), 109.50 (1.1BLN)

Source: DTCC