RBA & RBNZ easing expectations on the rise - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Australian and New Zealand dollars have both underperformed early this week driven by building expectations that the RBA and RBNZ will ease monetary policy at their next scheduled meetings on the 2nd and 10th August respectively. 

Key Quotes

“Easing expectations were reinforced overnight by the announcement from the RBNZ that it will further tighten macroprudential policy to help dampen financial stability risks from the “booming” housing market. “Under the proposed new restrictions no more than 5 percent of bank lending to residential property investors across New Zealand would be permitted to borrowers who have a deposit of less than 40 percent. No more than 10 percent of lending to owner-occupiers across New Zealand would be permitted to borrowers who have a deposit of less than 20 percent”.

The market has concluded that the RBNZ will likely feel more comfortable now about lowering rates further after taking action to combat one of the potential negative spill-over effects. The positive effects of lower rates to support the outlook for growth and inflation, and weaken the kiwi will take on greater weight. The latest CPI report released yesterday revealed that inflation remains uncomfortably low running at an annual rate of 0.4% in Q2. The market’s next focus will be the release of the RBNZ’s originally unscheduled economic update on Thursday.

The market is also expecting the RBA to ease monetary policy soon as well although is not as convinced it will occur as early as at their next meeting. The release overnight of the latest RBA minutes did not provide a strong signal that monetary easing will soon be forthcoming.

The main potential trigger for more immediate RBA easing could be the release of the latest CPI report for Q2 which is released on the 27th July. It will likely take a weaker than expected inflation print to tip the balance in favour of a rate cut. Building easing expectations are weighing on both the Aussie and kiwi in the near-term but downside should be limited by favourable external market conditions for carry.”