By: David Scutt, Market Analyst
Around seven basis points came out of October rate hike pricing after the Reserve Bank of New Zealand raised rates by 25 basis points, yet the New Zealand dollar fell hard enough to break its June uptrend. That mismatch is the point, because the New Zealand dollar selloff was far larger than the modest repricing in rate expectations could justify on its own. Markets had entered the meeting pricing a roughly two in three chance of another hike in October, and left it closer to one in three. The broader rate curve shifted lower but did not crack. The currency did.
David Scutt is a Senior Market Analyst for Global Macro at StoneX Media, with more than a decade spent dealing foreign exchange spot, forwards and money markets inside bank treasury, where he managed interest rate and liquidity risk. He produces technical and fundamental analysis across foreign exchange, commodities and equity indices, tracking the front end rate spreads that set currency direction.
Here is what happened. The Reserve Bank of New Zealand hiked as expected, then spent its statement describing growth as having moderated and remaining uneven, pointing at weak income growth, job insecurity and flat house prices weighing on household spending. Scutt notes that "the language also implies the prospect of a hike at every remaining meeting this year has likely diminished", which is the piece of the message that mattered to positioning rather than to the curve. Only a small amount of tightening came out of October pricing, and the broader curve shifted lower without breaking, yet the currency reaction was enormous by comparison. When a currency moves several times harder than the rate market that supposedly drives it, the excess is positioning unwinding rather than expectations resetting.
"That tells us the U.S. leg is doing much of the work right now", Scutt says, pointing to correlations that make the case bluntly. Over the past ten sessions the New Zealand dollar has run a 0.95 correlation with the New Zealand and U.S. two-year yield spread, and a negative 0.87 correlation with the U.S. two-year yield on its own. Those two figures together mean the pair is trading the American side of the spread, not the domestic one. Consequently, market expectations for what the Federal Reserve does next remain a central input into New Zealand dollar direction, and the Reserve Bank of New Zealand reaction is a shock that washes through rather than a new anchor. Traders reading only the domestic curve are watching the smaller of the two engines.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: David Scutt, StoneX Media Senior Market Analyst
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