(Repeats from Friday with no changes)
June 5 (Reuters) - The Reserve Bank of New Zealand's
predicament is far more complex than its messaging implies.
Hawkish rhetoric at the RBNZ's May 27 monetary policy meeting
prompted a wave of AUD/NZD selling that sent the cross down 2.5%
in three trading days. Markets were particularly responsive to
subsequentcomments by RBNZ Governor Anna Breman that the "OCR is
likely to increase sooner and by more than previously
signalled."
With the Reserve Bank of Australia turning less hawkish
following three consecutive rate hikes,it's logical to believe
the near relentless AUD/NZD rally since April 2025 might be
grinding to a halt. The 14.1% move has, after all, been
underwritten by divergence in both countries' policy rates.
However, AUD/NZD has already recovered more than half of its
initial losses, largely due to doubts about the RBNZ's
higher-faster rates narrative.
The most obvious question is: if the RBNZ is so hawkish on
rates, then why did it leave the OCR steady at 2.25% just over a
week ago? It was Breman's casting vote that delivered this
outcome.
Rhetoric aside, the inconvenient truth is that the RBNZ has very
limited ammunition in the inflation battle. Hawkish jawboning is
being used to amplify the impact of a constrained capacity to
tighten monetary policy in response to inflationary pressures.
New Zealand's economy is far from buoyant despite a cumulative
325 bps of easing since August 2024. Annual GDP remained insipid
at 1.3% in Q4, and while unemployment improved slightly to
5.3%, it remains close to 10-year highs.
New Zealand is facing stagflation. With the recent government
budget light on targeted fiscal support, the RBNZ is in a tight
spot: one or two rate hikes could push the economy back towards
recession.
This leaves AUD/NZD traders in a quandary: do they believe the
RBNZ rhetoric and unwind longs, or do they call its bluff, buy
the dip and wait for reality to play out?
AUD/NZD Monthly
(James Connell is a Reuters market analyst. The views expressed
are his own. Editing by Sonali Desai)
