RBNZ: Buy fresh kiwis – Deutsche Bank

Robin Winkler, Strategist at Deutsche Bank, sees hawkish risks from today’s RBNZ meeting and remain bullish on the kiwi.

Key Quotes

“First, the TWI now sits about 5% below forecast, a rare instance of the RBNZ having over-forecast the exchange rate. The statement could therefore soften the language around FX risks materially. By contrast, inflation has exceeded forecasts, and while much of the beat was due to volatile items, the RBNZ will have taken even more comfort from inflation expectations rising back above 2%. The dairy outlook also looks rosier.”

“Less obviously, there is a possibility that the Reserve Bank will take recent turmoil in the Canadian housing market as a warning to take steam out of the local market faster. To be sure, this lesson also applies to the RBA, but, as argued elsewhere, the cyclical case for continuing highly expansionary policy should remain stronger in Australia.”

“We also see reasons for the RBNZ to be optimistic on wage growth despite somewhat disappointing data. There are clear signs that the labour market is tightening and will soon generate greater wage pressure. While unemployment has stagnated, vacancy rates have risen—typically a leading indicator of wage pressure as employers need to offer better packages to find suitable employees. This skills shortage is not seen in Australia where, in our view, the labour market shows more slack.”

“All things considered, we expect the first OCR hike in the first quarter of 2018 but see the risk increasingly skewed toward a hike as early as November. Given the improved outlook, the RBNZ today could pencil in the start of the tightening cycle for late 2018, rather than mid-2019, which would likely come as a surprise to many. While the market is already discounting two full hikes by next summer, the RBNZ turning more hawkish themselves would likely do damage to front-end rates as well as to the sizeable kiwi shorts remaining on the IMM. Stay short AUD/NZD.”