More Easing from RBNZ? Not So Fast. And Powell Outlook

The Reserve Bank of New Zealand meets tonight and the big question is whether or not they will ease. On April 20th, RBNZ Governor Orr said negative rates are not ruled out and they will be thinking about additional stimulus in May. However with interest rates hovering just above zero at 0.25%, the bar for a rate cut is high. Instead, if the central bank were to ease, the next move would more likely be an increase in Quantitative Easing rather than lower interest rates.

Yet the jury is still out on whether more easing is necessary at this time. Since Orr’s comments 3 weeks ago, New Zealand data has been mixed with credit card spending and building permits plunging, but the trade balance improved and employment change remained positive in Q1 instead of falling as economists anticipated. Business confidence also improved in May after falling sharply in April. With New Zealand’s 2 month lockdown coming to an end, schools and businesses reopening, it may not be necessary for the RBNZ to ease immediately. There’s no question that New Zealand’s economy saw its sharpest contraction ever because of COVID-10 and a full fledged recovery is impossible without a global recovery but at this stage the cost of waiting is little.

If the central bank refrains from easing, NZD/USD will soar. The Reserve Bank will most likely leave the door open to additional easing to keep yields from rising too much during the recovery but even if they do, NZD should hold onto its gains. However if the Reserve Bank decides to increase the size of its Quantitative Easing program, NZDUSD will fall but the extent of the decline will depend on the central bank’s outlook which should be less pessimistic.

The US dollar traded lower against all of the major currencies on Tuesday on the back of the steepest decline in consumer prices ever. CPI fell -0.8% in the month of April which was right in line with expectations. However excluding food and energy costs, CPI growth fell -0.4% vs. forecast of -0.2%. The big focus for the greenback tomorrow will be Federal Reserve Chairman Powell’s economic update at 9am ET. We expect ongoing concerns with a hint of cautious optimism as the economy reopens. Investors are also eager to hear Powell’s view on negative rates. The central bank promised to provide ongoing stimulus but are negative rates on the table? Last week Fed fund futures started pricing in negative rates in December 2020 but yields popped back above zero after NFPs. However we believe Powell will downplay the need for negative rates, which would be consistent with the views shared by other policymakers in the last 48 hours. Fed Presidents Evan, Bostic, Kaplan and Bullard have all said they are not a fan of negative rates and don’t think it’s a good option for the US.

First quarter GDP numbers are also due from the UK on Wednesday and the country is expected to report its steepest quarterly contraction in 45 years. GBP/USD is trading in a tight range ahead of the report, but a deeper decline is likely. Last week the Bank of England left interest rates unchanged but a number of policymakers felt that more easing was necessary. This view along with downgraded growth and inflation forecasts means GBP is destined for further losses against all of the major currencies, but euro and the Canadian dollar in particular.