Fed’s and RBNZ’s hawkishness more bark than bite
Fed and RBNZ play the cautious patient game.
Group Research - Econs, Philip Wee23 May 2024
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The FOMC minutes sent the DXY Index higher by 0.3% to 104.92 and US equities lower. Some participants were willing to hike interest hike again if needed, unsure if financial conditions were sufficiently restrictive on aggregate demand and inflation. Notably, the US Treasury 10Y yield was barely changed at 4.42%. FOMC participants noted downside risks to economic activity, including a slowing Chinese economy and the deterioration in the commercial real estate (CRE) market, sharply tightening financial conditions. FOMC discussions were based on the stronger labor market and inflation data in 1Q24 and excluded the disappointing nonfarm payrolls or CPI inflation in April. The caution in the bond market is understandable, given how it went from pricing in seven rate cuts at the end of 2023 to doubts over rate cuts this year. Today, a surprise rise in initial jobless claims could send the DXY lower inside the 104.2-105 range marked by its 100- and 50-day moving averages. Despite last week’s drop in claims, the 4-week average kept increasing to its highest level in December.

NZD/USD ended Wednesday barely changed around 0.61 despite an initial spike to 0.6152. Although the Reserve Bank of Zealand reached a consensus to leave the cash rate unchanged at 5.50% for a seventh meeting, the Committee discussed the possibility of a hike. Apart from revising up the nominal long-run neutral rate was revised up by 25 bps to 2.75%, RBNZ increased cash rate forecasts for 1Q25 (5.62% vs. 5.47% previous) and 2Q25 (5.54% vs. 5.33%). While CPI inflation had declined, the fall in non-tradable inflation had been slow. The RBNZ monetary policy statement and press conferences were less hawkish than the headlines. With the policy rate above neutral, the RBNZ considered policy as contractionary and projected inflation returning to the 1-3% target band by the final quarter of this year. To abandon its patient stance to keep policy restrictive for a sustained period, RBNZ needs to domestic inflation to stop falling more slowly than expected to lower inflation expectations. We see NZD/USD underpinned at around 0.6070 and keeping mostly within 0.61-0.6150, the range it has gravitated to in the past week.

Quote of the day
“People will go for anything they don’t understand if it’s got enough hype.”
     Miles Davis

23 May in history
The Good Friday Agreement was accepted in a referendum in Northern Ireland with 75% voting yes in 1998.


Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


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