A bullish tilt from May

On May 26th the RBNZ took a bullish tilt in their monetary policy meeting. They signalled a forward rate forecast pointing to a 25bps rate hike in September 2022. This saw a boost higher in the NZ 10 year bonds and strength in the NZD for a few weeks, but then that strength faded.

Strong GDP gave reasons for optimism

However, the strong GDP in June gave reasons for optimism as it came in strong at 1.6% vs 0.5% expected. This too boosted NZD 10 year bond yields and the NZD.

Three investment banks revised their projections for the RBNZ seeing the bank hike interest rates as soon as 2022. This was after strong business confidence data from New Zealand raises the question as to whether conditions need to tighten and the bank raises interest rates. OiS pricing implies a greater than 80% probability of a November hike this year. So, this sets up a bullish outlook for the meeting in theory.

Nagging doubt

But here comes nagging doubt. The doubt is that the market has been too aggressive in its pricing despite the decent data. The pressure is on for the RBNZ to deliver a hawkish tilt which will involve the end of QE and bringing forward rate hike projections fast. Perhaps, too fast with the uncertainties around the Delta variant. If they don’t deliver expect the NZD to weaken and look out for AUDNZD upside.