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There was a fairly brief statement attached, in which the RBNZ raised its growth forecast through to March 2015 to 3.5% (from 3.3%). However, on the whole there was enough information for both the NZD bulls and bears.
One important paragraph states it is ‘important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand. The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure’.
The market will now place even more emphasis on the exchange rate and should act as a natural headwind should the pair continue its longer-term trend higher and onto 90 cents. Traders will also be paying close attention to future inflation reads, given the slight softness in the Q1 print. The Q2 inflation print comes out on July 16, so traders and economists will continue to focus closely on the key inputs that feed into this print and any thus weaker data will cause the NZD to fall fairly heavily, as rate hike expectations get priced out.
The RBNZ also placed more concern around the soft recent dairy auctions and any further weakness here could cause more aggressive downside in the NZD.
On this last point, one thing that keeps me fairly cautious on the NZD is the aggressive market pricing (the swaps market is currently pricing in 109 basis points of hikes over the coming twelve months). While I will always hold a positive bias on a currency with such high real rates and a hawkish central bank, we need to be cognisant of positioning and expectations.