A non-event for the New Zealand Dollar?

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• The Reserve Bank of New Zealand is expected to keep the Official Cash Rate unchanged at 5.5% in October.
• The RBNZ, with little room for surprises, may offer little help to the weak NZD/USD currency pair.
• The New Zealand Dollar shows a bearish tilt against the US Dollar after being rejected from above 0.6000.

The Reserve Bank of New Zealand (RBNZ) is on track to keep its key interest rate unchanged for the fourth straight time on Wednesday after its Monetary Policy Review. The central bank’s tone is expected to remain tilted to the hawkish side. Excluding any surprises in the Official Cash Rate (OCR), the focus will be on policy guidance.

The RBNZ will likely follow the RBA, which kept interest rates unchanged on Tuesday. The New Zealand Dollar (NZD) could remain relatively steady if the central bank delivers as expected.

RBNZ interest rate decision: All you need to know on Wednesday 

• US stocks closed in negative territory on Tuesday, with the Dow Jones losing 1.29% and the Nasdaq down by 1.87%. Meanwhile, the 10-year US Treasury bond yield reached 4.80% for the first time since 2007.
• The latest Chinese PMI survey offered mixed signs, indicating some stabilization in economic activity, which is a positive development after the deterioration seen in previous months.
• The US ISM Manufacturing PMI surpassed expectations, increasing from 47.6 in August to 49 in September, compared to the market consensus of 47.7. The Price Paid component dropped from 48.4 to 43.8. Key US jobs data is due later in the week, with the ADP Private Payroll report on Wednesday and the Nonfarm Payrolls on Friday. Solid US data has been a crucial driver in the ongoing US Dollar rally. 
• The latest NZIER Quarterly Survey of Business Opinion (QSBO) showed improved Business Confidence in New Zealand, rising from -63 to -52 over the quarter through September, but sentiment remains generally downbeat.
• Most NZIER’s Monetary Policy Shadow Board members recommended that the central bank hold the OCR at 5.50% in the October Monetary Policy Review. Two members recommended a 25 basis point hike.
• The RBNZ is unlikely to provide significant relief for NZD/USD, as US Dollar dynamics drive its movement in a context of risk aversion and lower commodity prices. 

Reserve Bank of New Zealand interest rate expectations: How will it impact NZD/USD? 

Analysts expect the Reserve Bank of New Zealand to keep the Official Cash Rate at 5.50% at the October Monetary Policy Review. The decision will be published at 01:00 GMT on Wednesday.

Market analysts and the shadow board see the RBNZ keeping rates unchanged. This reflects the expectation that the economy still has to fully experience the impact of past rate hikes.

At the August meeting, the RBNZ mentioned that they agreed that interest rates “need to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1-3% target range. In the near term, there is a risk that activity and inflation measures do not slow as much as expected.”

During the second quarter, Gross Domestic Product (GDP) growth came in stronger than expected, expanding by 0.9%, and the annual rate slowed from 2.2% to 1.8%, less markedly than expected. The Consumer Price Index (CPI) rose 1.1%, and the annual rate dropped from 6.7% to 6%. The RBNZ will likely wait until the following inflation report (due October 16) to consider changing the monetary policy stance. The next meeting of the RBNZ is scheduled for November 28-29, and the central bank will release the quarterly Monetary Policy Statement and hold a press conference, providing a better opportunity to deliver any changes.

According to the interest rate market, the odds of a hike in October are around 10% and rise to more than 50% for the November meeting. This represents a risk for the New Zealand Dollar, considering that if the central bank delivers a message that lowers these expectations, the Kiwi would suffer. On the contrary, it would take a bold hawkish twist to increase those expectations and potentially support the Kiwi. Policymakers have arguments to deliver the message in either way. However, most analysts expect no significant changes. There appears to be little room for surprises. 

Two shadow board members consider that the appropriate approach would be a 25 basis points rate hike, arguing that “upside risks to inflation have appeared more crystallized recently, and the Reserve Bank should increase the OCR sooner rather than later if it still expects to start cutting the OCR later next year.” 

The New Zealand Dollar will likely witness volatility around the policy announcement. The NZD/USD has experienced a sharp reversal during the last sessions. On Friday, it reached monthly highs near 0.6050 but then started to decline, falling below 0.6000. More recently, it has slid below the 20-day Simple Moving Average (SMA) and approached the September low that stands around 0.5860, which is a critical support area. A break below 0.5860 would increase the selling pressure, exposing the next support area between 0.5780 and 0.5800.

The New Zealand Dollar needs to post a daily close clearly above 0.6000 against the US Dollar in order to increase the odds of a more robust recovery. While below that level, the pair will likely continue to trade sideways around the 0.5900 mark, with risks tilted to the downside.