New Zealand Dollar Firms as RBNZ 'Doves' Set for Disappointment

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The New Zealand Dollar (NZD) edged higher ahead of the Reserve Bank of New Zealand's (RBNZ) final monetary policy decision for 2024, as markets brace for a potential disappointment to dovish expectations.

David Forrester, Senior FX Strategist at Crédit Agricole, highlights the likelihood of a more measured policy move by the central bank, contrary to speculation of a supersized interest rate cut.

In its upcoming decision, the RBNZ is widely expected to deliver a 50 basis point (bps) cut to the Official Cash Rate (OCR), bringing it to 4.25%.

This would mark the continuation of the central bank's easing cycle, which began in July and has already reduced rates by 125 bps this year. However, Forrester notes that markets are pricing in a 25% chance of an even larger 75 bps cut, setting the stage for potential disappointment among dovish investors.

“The NZ economy is showing signs of life after a double recession and aggressive RBNZ rate cuts,” Forrester stated in his latest research. "Business confidence and activity data have bounced back, and consumption appears to be stabilising, aided by improving card-spending data and record dairy payouts from Fonterra.”

Forrester further pointed out that the labour market is deteriorating less sharply than anticipated, while core and non-tradeable inflation remains elevated at 3.4% and 4.9% year-on-year, respectively.

These factors, coupled with the OCR still sitting well above the estimated neutral level of 3.00%, make a 75 bps cut less likely.

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Market Implications for NZD

A less aggressive RBNZ stance could support the New Zealand Dollar, Forrester argues. "The central bank is likely to signal a slower pace of easing than what the market has priced in," he said, adding that the decision could "disappoint the doves" betting on significant cuts.

Such a scenario could bolster the NZD as interest rate expectations are adjusted to reflect a more cautious approach by the RBNZ.

This perspective is already influencing FX markets. The NZD/USD pair saw modest gains in early trading as investors reassessed their expectations. A smaller rate cut or signals of slower easing in the future could further strengthen the currency, particularly if paired with an improved economic outlook.

While the RBNZ is expected to continue its focus on reviving growth, the central bank's measured approach may reflect ongoing concerns about inflation.

If the decision aligns with Forrester’s view, market expectations for aggressive easing over the next year—nearly 150 bps worth of cuts—could be scaled back, providing additional upside for the NZD.

The upcoming RBNZ announcement will be pivotal, not just for monetary policy but for the trajectory of the New Zealand Dollar as it reacts to the central bank's tone and future guidance.