PoundSterlingLIVE - "This week has a definite make-or-break feel about it as we head into the RBNZ MPS," says David Croy, a strategist at ANZ Bank, regarding the key event facing the New Zealand Dollar.
The Reserve Bank of New Zealand's Monetary Policy Statement is due on Wednesday, and ANZ is one of just two institutions we know of that predicts an interest rate rise (the other being TD Securities, who expect two hikes ahead).
"Our take is that the RBNZ won’t wait for the evidence to become incontrovertible that the OCR is too low; rather, it’s about rebalancing the risks of under- and over-achieving in a timely fashion," says Sharon Zollner, Chief Economist at ANZ.
The New Zealand Dollar is one of the better performers of the past month as investors have pushed back on rate cut expectations from the RBNZ, while calls for a further hike from ANZ helped boost market expectations for a development few foresaw at the start of the year.
Expectations for a hike are still low, at about 30%, which suggests ample upside in the NZ Dollar if a hike is delivered.
By the same token, the currency could fall if a hike is not delivered, although we suspect the downside would be limited as the RBNZ will almost certainly strike a 'hawkish' tone. In fact, should the RBNZ signal it is willing to hike again, the NZD could still outperform on the day.
The implications for the Pound to New Zealand Dollar exchange rate (GBP/NZD) is that we favour the downside in the near term, a view that is consistent with the downtrend that has been in place since the pair peaked in August 2023.
The exchange rate sits below its 200-day moving average, and only when it breaks above here would we shift to a more constructive stance on GBP/NZD on a multi-week timeframe.
The New Zealand Dollar will be in the driving seat of GBP/NZD owing to the clear UK calendar, and a test of 2.0375 is on the cards in the event of a hike / hawkish hold event.
A break of this level then opens the door to a retest of the December lows near 2.0083 over the coming weeks.
"The RBNZ joins the BoJ in the small club of central banks where interest rate hikes this year are still largely on the table. Governor Orr seemingly remains very concerned about inflation expectations, contributing to his hawkish messaging," says Ellie Henderson at Investec.
Expectations are for rates to be kept on hold at 5.50% but accompanied by a warning that interest rates could be lifted again at coming meetings, making for a 'hawkish hold'. Others are not so convinced the RBNZ needs to raise interest rates again and are expecting a more 'dovish' outcome.
"We believe the RBNZ will modestly downgrade its hawkish stance next week," says David Forester, Senior FX Strategist at Crédit Agricole.
Such an outcome would be unexpected and prompt markets to bring forward rate cut bets, which could result in a New Zealand Dollar decline owing to the 'hawkish' preference of the market consensus.
Under such a scenario, we would expect the GBP/NZD exchange rate to return towards the 200-day MA, currently located at 2.0572, over the days following the MPS.
Crédit Agricole says consumer demand in the economy is weak, which should keep the RBNZ from hiking.
Forrester cites real retail sales falling by -1.9% QoQ in Q4, an eighth consecutive decline and the largest quarterly contraction over the past two years in Q4.
"The very weak consumption data will put further pressure on the RBNZ to relinquish its very hawkish stance," says Forester.
An original version of this article can be viewed at Pound Sterling Live