Reserve Bank of New Zealand Preview: To hike or not to hike amid fresh covid lockdown

NZD/USD is licking its wounds after a massive slump that came just a day ahead of the much-awaited Reserve Bank of New Zealand’s monetary policy announcement on Wednesday. A single coronavirus case identified in the South Pacific Island nation has shaken off the market’s pricing of the first post-pandemic rate hike, negatively impacting the NZD valuations.

RBNZ to go for a dovish rate hike?

The RBNZ is widely expected to announce a 25-bps hike to its Official Cash Rate (OCR), lifting it from a record low of 0.25% to 0.50%, ending a run of eight straight meetings of no-rate change.

The central bank surprised markets in July by ending its bond-buying programme and flagging that "the significant level of monetary support in place since mid-2020 could be reduced sooner."

The rate decision will be announced on Wednesday at 0200 GMT. Governor Adrian Orr will hold a press conference at this review, which will also see fresh economic projections.

Until a few hours ago, markets were extremely upbeat on the RBNZ rate hike, which could likely place New Zealand as the first Asia-Pac region to embark upon a tightening journey after the pandemic began.

Many industry experts and analysts even called on for a 50bps rate increase, given the nation’s relative success in battling the coronavirus crisis and encouraging economic performance.

New Zealand's unemployment rate unexpectedly fell to 4.0% in the second quarter while the economy grew much faster than expected in the first quarter, arriving at 1.6% QoQ vs. 0.5% growth expected.

The housing boom and rising inflation signalled overheating of the economy, which almost pencilled in an earlier-than-expected tightening by the kiwi central bank.

However, the narrative backing the rate lift-off seems to have changed somewhat after New Zealand identified a COVID-19 community case in Auckland, which prompted Prime Minister Jacinda to go for a hard-line approach once again and announce a three-day nationwide lockdown starting Wednesday.

In light of this development, major banks such as Westpac and ASB revised their rate hike call for Wednesday’s RBNZ’s meeting. Both the banks now see no rate hike coming at August’s policy meeting.  

That said, the RBNZ could likely go on with a 25bps increase to its OCR, refraining from an all-out 50bps hike and sounding overtly upbeat on the economic prospects. It would be imprudent for the RBNZ to be optimistic about the economic recovery, as the covid resurgence could bring back uncertainty.

Meanwhile, rising Delta covid variant cases globally combined with a slowdown in the Chinese economy could also lead the RBNZ to refrain from talking up further tightening expectations, as the forward guidance and economic projections will hold the key.

NZD/USD probable scenarios

A battered New Zealand dollar sees no respite heading towards Wednesday’s RBNZ events, as NZD/USD bulls remain on the sidelines ahead of the critical US Retail Sales release due later this Tuesday. Irrespective of the outcome of the US data, the American dollar is likely to hold onto its recent advances, benefiting from risk-off flows and Fed’s hawkish expectations.

NZD/USD is wallowing near three-week lows of 0.6907 amid oversold conditions spotted on the four-hour chart, suggesting a rebound could be in the offing. However, as a 25-bps rate hike is already priced in by the markets, a dovish tilt by the RBNZ could hit the kiwi harder, defying the oversold charting conditions and calling for a sustained breach of the 0.6900 threshold towards the 0.6880 demand zone.

A hawkish surprise by the NZ central, shrugging off the virus concerns while maintaining its July rhetoric, could save the day for the NZD bulls. For a meaningful recovery, the currency pair has to decisively recapture the horizontal 200-Simple Moving Average (DMA) at 0.6995. Further up, stiff resistance awaits around 0.7010, the confluence of the 21, 50 and 100 averages.

NZD/USD: Four-hour chart

More: How to trade the RBNZ rate decision in light of new Auckland COVID-19 case