NZD Interest Rates To Move Above 5.00% In 2017…

RBNZ – Reserve Bank of New Zealand is the first (many to follow)  central bank of a developed economy shifting to a monetary tightening policy, and while the 0.25% OCR (Overnight Cash Rate) rate hike was priced well ahead of the announcement, the NZD still managed to gain over 150 pips from the pre-release level to as high as the $0.8600, or a total of  175 pips week to date.  RBNZ justified the rate adjustment by stating that inflationary pressures are set to continue to rise over the next couple of years, and that the Loan to Value Ratio (LVR) lending limits policies are having a faster than expected impact, and domestic expansion is becoming more broad based amid very high consumer and business confidence. Also adding to the positive, RBNZ Wheeler noted that the estimated GDP from year to March will be around 3.3%, but the high exchange rate remains a headwind to the tradables sector.  Although the Bank does not believe the current level of the exchange rate is sustainable in the long run…

Furthermore, in the post rate decision RBNZ Press Conference, both Governor Wheeler and Assistant Governor McDermott stated:

• Sees up to 125 basis points of rate increases this year
• House price inflation is seeing moderation thanks to loan curbs put in place.
• Wage pressures are building further; May fan inflation.
• New Zealand economy has high export dependency on China.
• Opportunities for Forex intervention are very limited.
• RBNZ Assistant Gov McDermott: neutral rate is still around 4.5%

According to a  HSBC New Zealand analyst, he expects that RBNZ to raise rates again in April, and he sees additional 75 basis points of hikes in 2014 (making the OCR at 3.50%), in essence, RBNZ on path to return rates to normal levels… And Westpac’s Speizer also commented that:

RBNZ provided a significant positive surprise – RBNZ’s 90-day interest forecast was raised by 23 basis points at the Dec-14 point, to imply an OCR by then of 3.75%. Prior to the MPS, the market had priced in 3.64% – By extending the forecast to 2017 today, the RBNZ has also signaled its projected terminal rate at least 5.00%. Earlier, the market had priced in a 4.50% terminal rate. Expect NZD strength to continue, with AUDNZD testing 1.05.

Interestingly, with RBNZ firing the first shot against inflation while other developed economies on standby, it’s conceivable to believe that NZD is on a strong bullish path, perhaps even rival the strength of the USD despite of Fed’s recent shift into bond purchase tapering.  All in all I would be interested in going LONG on the NZD, whether it’s against the USD or the AUD.  Of course, with RBA monitoring the exchange rates of AUD very closely, with Stevens calling the AUDUSD 0.9000 level as high, AUDNZD is expected to drop further, perhaps even restest the historical low levels as the divergence in sentiments between RBA and RBNZ progresses.

Thanks,