Can carry trade be a reason to hike the rates earlier!
News Zealand surprised the markets earlier by announcing another lockdown. Jacinda Ardern, the prime minister, announced a three-day lockdown on discovering the first community case of Covid-19 since February. (Bloomberg)
And now we have a question: While the market is expecting a rate hike by 25 basic points from tomorrow`s meeting, can this lockdown change the policymakers` minds?
Let`s check the market expectations first. There are many reasons and signs that New Zealand`s economy has already recovered and even overheated with great government helps. According to the published economic data, GDP in the First quarter of 2021 increased by 2.4% (YoY) comparing with 1.8% of the 4th quarter of 2019 (Pre-Pandemic). The unemployment rate fell back to its pre-pandemic level of 4%, the New Zealand full-employment rate.
Having these data, while inflation raised to 3.3% from 1.9% of pre-pandemic, and the housing market is booming, now the market is fully pricing on a rate hike as much as 0.25%.
On the other hand, RBNZ can create a fantastic opportunity for Cary traders to carry their investment into New Zealand. If tomorrow as it is expecting, the central bank hikes the rates, it will put the lower rate currencies, which can have a stable future or even raise, like the US dollar and Japanese Yen, in the sell, against Kiwi. Investors will have enough encouragement to buy Kiwi and hold it in New Zealand`s banks to have higher rates, and it can help the domestic market and stocks to raise and gain from this capital inflow; if so, in the next meeting, then we will have to expect that RBNZ to stop bond purchasing plan.
In the currency market, these predicted decisions of the Rate hikes and tapering the bond purchasing plan are expected to lift the Kiwi. The current rate of 0.6925 confirmed itself as a key support level in the Daily chart. With today`s free-fall, technical indicators suddenly lost their bullish attitude and now have some sort of returning signal; however, to conform to the low rate, we have to wait and see if the pairing can close under this level today or not. On the flip side, staying stable above this level will bring back the bullish market attitude.